Mutual fund investors have to be conscious of the fees they pay management companies to invest their money, and no-load mutual funds can be a great way to avoid some of the worst fees that Wall Street charges. No-load funds are mutual funds that fund companies offer to current and potential investors without tacking on sales charges, which are also known as sales loads. Unlike load funds, which essentially collect commissions that go to your broker or financial advisor when you buy shares, no-load funds don't involve any direct payment to any financial professional who might assist you.
That said, just because a mutual fund has no load doesn't mean it can't have high fees. However, it at least won't drain money from your investment before you even buy shares.
The evolution of no-load funds
Throughout much of their history, mutual funds regularly charged sales loads. Because the brokerage industry was subject to regulation restricting how much various institutions could charge in commissions, the costs of trading stocks and bonds were much higher than they are now. As a result, most investors took it for granted that they'd have to pay what amounted to a sales commission in order to get access to mutual funds. Loads therefore persisted for decades.
In the 1970s, however, commissions were deregulated, lowering competition and opening the door for low-cost mutual funds. No-load mutual funds proliferated, and mutual fund investors increasingly felt that they shouldn't have to pay onerous sales commissions just to get access to an investment vehicle. Now, there are thousands of no-load mutual funds, and many of the biggest mutual funds in the market don't charge sales loads to would-be shareholders seeking to invest.
Why you still have to be careful with no-load funds
The most important thing to remember about no-load funds is that a company only has to avoid sales charges in order to deem its funds "no load." Funds are still allowed to charge purchase fees when you buy, or redemption fees when you sell, so long as the proceeds go to the fund itself, rather than an investment professional. The marketing fees that are allowed under Rule 12b-1 also don't affect a fund's ability to call itself no-load. Funds can also charge exchange fees, account maintenance fees, and other miscellaneous fees. Moreover, the regular management fees that go into the fund's expense ratio aren't limited by the no-load designation. If other fees are high enough, then the lack of a sales load won't make that fund a better investment.
That said, choosing a no-load fund is a good starting point for avoiding fees. As long as you look at any other fees it might charge, you'll usually end up better off than you would be buying a mutual fund with a sales load.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at email@example.com. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.