A no-load mutual fund is a mutual fund which will not levy a commission or a sales charge at the time that someone buys into the fund (“front-loaded” funds) or sells their share in the fund (“back-loaded funds”). For this reason, no-load mutual funds are effectively a cheaper and therefore more effective investment for individual savers.
Mutual funds are, in essence, a way of investing in the market while diversifying risk without requiring the up-front capital a person would need to actually buy shares in a very large number of companies. Mutual funds pool the contributions from investors, and then buy shares or bonds in a large number of companies, usually specializing in a specified region, sector, or part of the stock exchange. Diversification is an essential tactic in investment: investing in a large number of companies, across sectors and regions, automatically means that you will be exposed to less risk in the event that a single company collapses, or a single region experiences a serious recession. For this reason, mutual funds have for decades been the preferred investment vehicle offered by financial advisors to individual consumers looking for a way to save money for retirement.
However, while mutual funds are helpful for diversifying risk without requiring massive capital from a single investor, they are not a free investment. Brokers arranging your purchase – or sale – of a share of a mutual fund must be paid for their services. The mutual fund has a professional manager who must be compensated, and usually compensated very well, for handling all of the investment decisions for the fund. The fund itself has various other costs which must be covered as well.
Typically there are two ways that the fund covers these costs. The first, the so-called management expense ratio (MER), is an annual charge levied in order to pay the fees and costs of investing, and to compensate the managers. Paying an MER is more or less unavoidable when buying into a mutual fund, although different funds may offer lower rates than others. (This is not necessarily beneficial, since some funds will also perform better than others despite charging a higher MER.)
The second component, which often covers a commission or charge by the broker, is the so-called “load,” be it assessed immediately when you enter the fund (“front-load”), as a regular annual charge (“level-load”), or when you sell out of the fund (“back-loaded”). These fees can be high, typically several percent of the total value of your investment (for example, 5%). What this means, from the perspective of the investor, is that you have to stay in the market longer, and make even more money, simply to cover the costs of the commissions you are paying. If the money is subtracted at the beginning, it will take longer for your investment to grow to your target level. If it is deducted when you sell, then you must raise your target level accordingly to cover the costs.
For this reason, many mutual funds now attempt to market themselves better to consumers by simply eliminating the commissions, or “loads,” altogether. A no-load mutual fund is a mutual fund which will not charge you these commissions or charges, either up front or when you sell. Note that this does not mean that a no-load mutual fund is a no-cost mutual fund. The management expenses for the mutual fund still have to be covered, typically through the so-called MER. Note that, under America law, part of the management expenses of a no-load fund can include a commission or fee (known after the section of the law which regulates it, as a “12b-1” fee), of up to 0.25%.