Difference Between Load and No-Load Mutual Funds
The world of mutual funds has a great divide between load and no-load funds. The "load" is a sales charge or commission that the fund company charges on newly purchased shares. No-load funds do not have a sales charge, and 100 percent of a purchase goes to buy shares.
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Function
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The value of a mutual fund share is called the NAV, for net asset value. The NAV is the total value of the securities owned by the fund, divided by the number of shares owned by investors. The NAV is the price quoted in the newspaper and on financial websites. Investors in no-load funds buy shares at the NAV price.
Load funds add a percentage to the NAV to arrive at a sales price called the public offering price, or POP. Investors purchase shares at the POP price, and they are worth the NAV. The difference is the sales charge, which can range from 1 percent to 6 percent.
Types
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Load funds come in two basic types. The classic, front-end loaded funds put the sales charge in the offering price, and investors pay the charge upfront. Back-end loaded funds, often called B-shares, have a contingent deferred sales charge. Investors who buy B-shares purchase at NAV, but they will pay a declining surrender charge if they sell within four or five years.
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Considerations
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Load mutual funds are sold primarily by full-service stockbrokers and investment advisers. The funds pay the adviser and their firms most of the sales charge as commissions. Investors who want an adviser to help them select the most appropriate funds for their financial circumstances will usually invest in load funds.
No-load funds are for investors who are comfortable doing their own investment research. Financial magazines recommend their favorite no-load funds, but the investor is ultimately responsible for the funds she picks and how well they perform.
Potential
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Investors with significant sums to invest in mutual funds can buy load funds with little or no sales charge and get professional investment advice. Load funds have breakpoints, or investment levels at which the sales charge percentage is reduced. Breakpoints start at $25,000 or $50,000, and at $500,000 or $1 million the sales charge is reduced to zero. Different fund investments across a family of funds can be combined to reach the breakpoint.
Warning
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Back-end loaded or B-share mutual fund shares are not no-load funds. The broker receives the same amount of commission as with front-loaded funds. The fund makes up the money paid to the broker by charging higher internal expenses on the B-shares compared to the front-loaded shares of the same fund.
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