The Advantage of No-Load Mutual Funds

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Written By Mark

Mark is the co-owner of and has many years of experience in financial markets. 

Anyone who invests in mutual funds has to make certain fundamental decisions along the way. One of them involves the very fund structure itself. Do you invest in a no-load fund or a load fund? There are arguments made in favor of either decision.

Load funds are crucial because they provide advice based on research. No-load funds are a means of saving money since unnecessary costs are eliminated.

Two Kinds of Mutual Funds

The first thing to do is to know the various kinds of different mutual fund structures. A load fund will charge a commission, but a no-load fund doesn’t.

Also, most load funds also charge annual distribution fees. These are known specifically as 12b-1 fees, and they’re used to cover marketing costs.

Those costs usually land in a range of 0.25% to 1% of the total annual asset value. There are even some no-load funds that charge these 12b-1 fees, although a no-load fund that doesn’t charge any of these fees is known as a true no-load or a 100% no-load.

How Load Funds Are Structured

Load funds are often structured in three distinct ways:

  1. Front-End: The commission is paid initially. It will range from 3% up to 6.25% of the overall investment. The 12b-1 fees for front-end load funds typically happen around 0.25%.
  2. Back-End: This might also be known as a contingent deferred sales charge. The commission is paid at the time the fund gets sold. That commission would start off at 5% of the overall fund value but decline 1% every year until it hits 0% after the fifth year. Back-end load funds typically have 12b-1 fees of 1% but convert to 0.25% following five years.
  3. Level Load: In a level-load fund, the commission is paid initially, typically equivalent to 1% of the overall investment. Expect 12b-1 fees in a level-load fund to be 1% for the duration of your ownership.

Is There a Noticeable Difference?

In deciding whether or not there’s a truly substantial difference between load funds or no-load funds, it’s useful to consider an analogy of an Olympic 100-yard race.

Assuming the participants in the race are equal in terms of their ability, but one has a head start of several yards, then it should be obvious who is going to win.

As a matter of fact, someone with such a head start could only lose if another competitor was tremendously superior to them.

In the examples about to be listed, make the assumption that every “competitor” has abilities equal to each other so that you can see accurate performance differences between the funds.

The following examples all assume:

  • An investment of $10,000
  • A conservative rate of 9% annual net return
  • Annual fund operating costs of 1%
  • Performance over three years

They will highlight the differences in return on investment and cumulative total return between four distinct kinds of mutual fund structures.

Cumulative Return Comparisons

A 100% No-Load Fund With No 12b-1 Fee

  • Start: $10,000
  • Year 1: $10,900
  • Year 2: $11,881
  • Year 3: $12,950

A 5.75% Front-End Load Fund With a 0.25% Per-Year 12b-1 Fee

  • Start: $9,425
  • Year 1: $10,248
  • Year 2: $11,142
  • Year 3: $12,114

A 3% Back-End Load Fund With a 1% Per-Year 12b-1 fee (Sale at End of Year 3)

  • Start: $10,000
  • Year 1: $10,791
  • Year 2: $11,645
  • Year 3: $12,189

A 1% Level-Load Fund With a 1% Per-Year 12b-1 Fee

  • Start: $9,900
  • Year 1: $10,683
  • Year 2: $11,528
  • Year 3: $12,440

Cumulative Return on Investment

A 100% No-Load Fund With No 12b-1 Fee

  • Year 1: 9.0%
  • Year 2: 18.8%
  • Year 3: 29.5%

A 5.75% Front-End Load Fund With a 0.25% Per-Year 12b-1 Fee

  • Year 1: 2.5%
  • Year 2: 11.4%
  • Year 3: 21.9%

A 3% Back-End Load Fund With a 1% Per-Year 12b-1 fee (Sale at End of Year 3)

  • Year 1: 7.9%
  • Year 2: 16.5%
  • Year 3: 21.9%

A 1% Level-Load Fund With a 1% Per-Year 12b-1 Fee*

  • Year 1: 6.8%
  • Year 2: 15.3%
  • Year 3: 24.4%

*Over a longer period of time, the ongoing 1% annual 12b-1 fee of a 1% level-load fund will eat into the cumulative return to the point that it seriously lags behind either front- or back-end load funds.


In these examples, the cumulative ROI for the 100% no-load fund clearly outperforms the other three funds.

It does better than the front-load fund by nearly 40%, the back-end fund by almost 35%, and the level-load fund by nearly 17%. This happens even though each fund has an equivalent annual rate of return.

The ROI benefits of the no-load fund happen because there are neither annual 12b-1 distribution nor sales load fees. The resulting advantages are quite obvious.

If the annual rate of return parameter goes under 9%, then the comparative ROI differences grow even more dramatically. However, they are not as dramatic for annual return rates going over 9%.

Does this mean that every no-load fund is superior to a load fund? The answer to that is no. A front-end load fund enjoying a 15% annual return is going to outperform no-load funds only getting 9%.

Having said that, no-load funds that have above-average Morningstar rankings are most likely to do better than load funds, if the funds are in the same fund category (such as small growth, mid blend, large value, large growth) and a time span of three years or more.

A Warning on Fees

Watch out for asset-based fees. The last several years have seen quite a few major advisory and brokerage firms make announcements of no-load funds in a lot of fund families that don’t charge commissions, much less 12b-1 fees.

The reality is that these firms are compensating salesmen through member charges, and sometimes this is as much as 2% of the annual assets.

It doesn’t take long for these fees to surpass even 5% front-end loads. Avoiding fees like these help you maintain the advantage that no-load funds provide.

Do keep in mind that asset-based fees can be worth it for you, especially if you have an important amount to invest, you might want to look for an actively managed fund with a dedicated manager.

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