No-Load Fund: Definition, How It Works, Benefits, and Examples

What Is a No-Load Fund?

A no-load fund is a mutual fund in which shares are sold without a commission or sales charge. Investment companies typically forgo charging a load if they offer the fund themselves, not through a second party like a broker. Load funds—with either front-load or back-load—charge a commission when you buy into the fund or sell your stake. Also, there are level-load mutual funds with fees that continue for as long as you're an investor. Just over 90% of mutual funds don't charge loads—compared with over 90% 50 years ago—and you can avoid these fees often enough, even when going through a broker.

While it's best to avoid these fees—funds with commissions don't perform better any more than paying one to a car dealer makes it run faster—there are other costs for mutual funds to watch.

Understanding a No-Load Fund

Because there is no transaction fee to invest in a no-load fund, more of the money you put in should be working for you. For example, if you invest $10,000 in a no-load mutual fund, all $10,000 will be invested into the fund.

Meanwhile, if you invest in a load fund that charges a front-end load (sales commission) of 5%, the amount of your stake will only be worth $9,500. If the fund holds a contingent deferred sales charge (CDSC), an expense paid at the time of selling the fund, and the $500 sales commission comes out of the profits of the sale. The CDSC declines each year the fund is held. Should you have a level-load mutual fund, the 12b-1 fees can be up to 1% of the fund's total assets. The deduction for this charge is annual for as long as you own a stake in the fund.

These might not seem like much at the beginning, but $500 upfront could mean, if your mutual fund gets, say, average returns of 10%, you'll be out about $3,400 in 20 years when you're set to retire.

Why Are There Loads?

The justification for loads is compensating an intermediary such as a broker, financial planner, investment advisor, or other professionals for their time and expertise in helping you find the mutual fund that's right for you. Some investors find paying these fees bothersome, and no-load funds have become so ubiquitous that most fund managers have stopped advertising them as something special.

That said, even no-load funds have fees that you have to pay. All mutual funds have charges to cover the costs of managing the fund. The main one is the expense ratio, which is the percentage of assets under management and covers operating and administrative costs. The largest portion of this fee is to pay for the work of the fund manager and advisor. Every investor pays this fee since it comes out of the assets in which each has a stake. Others, like 12b-1 (to cover sales and like costs, capped at 1% by regulators) and redemption (charged should you sell your stake within months of investing) fees, are essential to review against the benefits of a fund, too.

Overall, though, the move to no-load funds, lower minimum investments, and a 60% drop in the average expense ratio since the 1990s has meant that far more of your savings go into your future retirement, not the pockets of intermediaries who might add little of value to the fund.

Real-World Examples

The Vanguard Group popularized no-load funds in the late 1970s, converting its 14 funds to no-load by going around intermediaries and offering them directly to shareholders. Its first public index fund, now known as Vanguard 500 Index Fund (VFIAX), charges no loads, has a minimum investment of $3,000, and an expense ratio of 0.04%, a shave off the average index fund ratio of 0.05% in 2023. The no-load approach was among the reasons VFIAX caught on, and it holds $1.11 trillion in net assets as of the end of the first quarter of 2024. Tracking the S&P 500 has given it three, five, and 10-year returns of 11.44%, 15.01%, and 12.92%, respectively.

T. Rowe Price, founded in 1937, began offering its Balanced Fund (RPBAX) in 1939 and is another of the oldest no-load funds. This fund provides both potential capital appreciation through stocks and the income stability of bonds. It's intended for investors looking for a moderate approach, leveraging stocks for higher potential returns while using bonds to mitigate volatility. The fund typically allocates about 65% of its assets to stocks and 35% to fixed-income securities, although these proportions can vary based on economic conditions and the market outlook. As of the end of the first quarter of 2024, the fund had an expense ratio of 0.61% and total assets of $4.62 billion. At the same time, it had trailing returns of 4.38%, 8.18%, and 7.34% for the last three, five, and 10 years, respectively.

The Bottom Line

No-load funds offer a cost-effective option by selling shares without commissions or sales charges. This approach reduces expenses and allows you to invest more in the fund. Once relatively rare among mutual funds, no-load funds now cover over 90% of those offered.