No-Load Fund

What a Sales Load Is

Investor.gov defines a load, also called a sales load or sales charge, as a fee that investors pay when they buy, in the case of a front-end sales load, or redeem, in the case of a back-end sales load, shares in a mutual fund, and compares it to a commission. The SEC's investor bulletin on mutual fund and exchange-traded fund fees and expenses, called the fees bulletin in this entry, states that a sales load or sales charge is a fee mutual funds typically use to compensate brokers who sell their shares, and that sales loads can be front-end or back-end.

FINRA's investor page on mutual funds describes three kinds of loads. A front-end load is a commission paid at the time the shares are bought, a back-end load is a charge paid only if the investor sells during the period the charge applies, and a level load is an amount the fund collects every year the investor holds the fund. Investor.gov states that a no-load mutual fund does not charge any type of sales load.

The Fees a No-Load Fund May Still Charge

Investor.gov states that no-load does not mean no fees, that not every type of shareholder fee is a sales load, and that a no-load fund may charge fees that are not sales loads. It gives as examples purchase fees, redemption fees, exchange fees, and account fees. The fees bulletin states that a no-load fund is permitted to charge purchase fees, redemption fees, exchange fees and account fees, and describes shareholder fees as mutual fund costs charged directly to the investor.

Investor.gov defines a purchase fee as a fee that some mutual funds charge when investors buy fund shares. It states that a purchase fee is not the same as, and may be in addition to, a front-end sales load, and that a purchase fee is paid to the mutual fund while a front-end sales load is paid to a selling broker.

The SEC's guide defines a redemption fee as a fee some mutual funds charge investors when they sell or redeem their shares within a certain time frame of purchasing the shares. The fees bulletin states that the redemption fee is paid directly to the mutual fund, not to a broker, and FINRA states that funds often charge a redemption fee to investors who sell shares shortly after buying them.

Investor.gov defines an exchange fee as a fee that some mutual funds impose on shareholders if they exchange shares in one mutual fund for shares of another mutual fund within the same mutual fund family.

Investor.gov defines an account fee as a fee that some mutual funds impose on investors for account maintenance, and gives the example that some mutual funds charge this fee on accounts valued at less than a specified dollar amount.

The Annual Operating Expenses of a No-Load Fund

The SEC's guide states that no-load funds also have annual fund operating expenses that investors pay for indirectly through fund assets, and its glossary states that no-load funds also charge operating expenses. The fees bulletin states that management fees are paid to the fund's investment adviser, or its affiliates, and that distribution fees cover the marketing and selling of fund shares. The SEC's investor bulletin on mutual fund classes, called the classes bulletin in this entry, states that no-load classes, like all classes, still have ongoing operating costs, such as management fees, transfer agent fees and other operating expenses including, in some cases, 12b-1 fees.

The fees bulletin expresses total annual fund operating expenses as a percentage of the fund's average net assets, called the expense ratio. FINRA states that the expense ratio does not include loads, which it describes as fees an investor may pay when buying or selling the fund. FINRA also states that transaction fees, which the mutual fund pays to a brokerage firm to execute its buy and sell orders, are not included in the expense ratio but are subtracted before the fund's return is calculated.

The fees bulletin states that fees and expenses reduce the value of a fund's investment returns, and that a fund with higher costs must perform better than a lower-cost fund to generate the same returns. The SEC's guide states that all mutual funds and exchange-traded funds have costs that lower investment returns, and tells investors to shop around and compare fees.

The Share Classes That Carry No Sales Load

The classes bulletin states that some mutual funds offer share classes with no sales load. It discusses retail no-load shares, institutional shares labeled Class I, and retirement share classes.

The bulletin states that retail no-load shares may go by a variety of names. It states that these classes are commonly available to retail investors directly through a brokerage account, and the same sentence also names the fund family and an investment advisory account. It states that there is typically no transaction fee charged to the investor upon purchase but that the class of shares may pay 12b-1 fees.

Institutional shares, labeled Class I, may have some of the lowest ongoing operating expenses, but there could be relatively high initial investment minimums, transaction fees, or both to invest directly through a brokerage account. The bulletin states that many mutual funds make these shares available to retail investors without requiring a high initial investment minimum, through various means, including through an employer, for example through a retirement plan, or through an investment advisory account.

Retirement share classes are typically only available through an employer-sponsored retirement plan, such as a 401(k). The bulletin states that mutual funds may offer more than one retirement share class, with different levels of ongoing operating expenses, including classes with and without 12b-1 fees.

The bulletin states that additional types of classes may exist for some funds, that an investor should consider which class is best when a fund offers several, and that the share class with the lowest initial fees may not be the share class with the lowest fees over time. FINRA states that investors typically buy no-load shares directly from the investment company that offers the funds.

Transaction Shares

FINRA's investor page has a section headed Transaction (Clean) Shares, which states that Transaction Shares is a term that applies to a class of fund shares without any front-end load, deferred sales charge, 12b-1 fees or other asset-based fee for sales or distribution. FINRA states that although transaction shares do not impose sales charges, in some cases a brokerage firm may separately require the investor to pay a sales commission when investing in these shares.

FINRA states that an investor whose trades generate a commission should work with an investment professional to estimate the trading frequency for the fund, and that an investor in transaction shares through an investment advisory account typically pays the investment adviser a fee equal to a percentage of the assets in the account. It states that some brokerage firms may not offer breakpoint discounts or waivers that would be available on Class A shares, such as through rights of accumulation, letters of intent and exchanging shares of one fund for shares of another fund in the same family.

FINRA Rule 2341 and Describing a Fund as No-Load

FINRA Rule 2341 contains the rule on describing a fund as no-load. Paragraph (d), titled Sales Charge, includes paragraph (d)(4), which states that no member or person associated with a member shall, either orally or in writing, describe an investment company as being no load or as having no sales charge if the investment company has a front-end or deferred sales charge, or if its total charges against net assets to provide for sales related expenses and/or service fees exceed 0.25 percent of average net assets per annum.

The terms in that paragraph are defined in paragraph (b). Under paragraph (b)(8)(C), a front-end sales charge is a sales charge that is included in the public offering price of the shares of an investment company. Under paragraph (b)(8)(B), a deferred sales charge is any amount properly chargeable to sales or promotional expenses that is paid by a shareholder after purchase but before or upon redemption. Under paragraph (b)(8)(A), an asset-based sales charge is a sales charge that is deducted from the net assets of an investment company and does not include a service fee. Under paragraph (b)(9), service fees, as used in paragraph (d), are payments by an investment company for personal service and/or the maintenance of shareholder accounts.

The 12b-1 Fee and No-Load Funds

FINRA describes 12b-1 fees as fees, capped at 1 percent of the investor's assets in the fund, that are taken out of the fund's assets to pay for the cost of marketing and selling the fund, for some shareholder services, and sometimes to pay employee bonuses. The fees bulletin states that 12b-1 fees are paid out of fund assets to cover distribution expenses and that, typically, 12b-1 fees apply to mutual funds but not to exchange-traded funds. The classes bulletin states that retail no-load shares may pay 12b-1 fees, and that retirement share classes may be offered with and without them. FINRA states that transaction shares carry no 12b-1 fees.

SEC Rule 12b-1 under the Investment Company Act of 1940 is the rule on the distribution of shares by a registered open-end management investment company. Paragraph (a)(1) makes it unlawful for a registered open-end management investment company, other than a company complying with the provisions of section 10(d) of that Act, to act as a distributor of securities of which it is the issuer, except through an underwriter, and paragraph (a)(2) treats a company as acting as a distributor if it engages directly or indirectly in financing any activity which is primarily intended to result in the sale of shares. Paragraph (b) permits a company to act as a distributor if its payments are made under a written plan describing all material aspects of the proposed financing and the agreements are in writing. The rule itself does not set a percentage cap on the fee.

The percentage limits come from FINRA Rule 2341. Paragraph (d)(5) bars a member from offering or selling the securities of an investment company if the service fees paid by the company, as disclosed in the prospectus, exceed 0.25 percent of its average annual net assets, or if a service fee paid to any person who sells its shares exceeds 0.25 percent of the average annual net asset value of those shares. For an investment company with an asset-based sales charge, paragraph (d)(2)(E)(i) bars a member from offering or selling its shares if the asset-based sales charge exceeds 0.75 percent per year of the average annual net assets of the investment company.

SEC Rule 22c-2 and Redemption Fees

SEC Rule 22c-2 under the Investment Company Act of 1940 is titled Redemption fees for redeemable securities. Paragraph (a) makes it unlawful for any fund issuing redeemable securities, its principal underwriter, or any dealer in such securities to redeem a redeemable security issued by the fund within seven calendar days after the security was purchased, unless it complies with the requirements that follow. 

Under paragraph (a)(1), the fund's board of directors, including a majority of directors who are not interested persons of the fund, must either approve a redemption fee or determine that imposition of a redemption fee is either not necessary or not appropriate. The fee that the board may approve is one in an amount of no more than two percent of the value of shares redeemed, on shares redeemed within a time period of no less than seven calendar days, that in its judgment is necessary or appropriate to recoup for the fund the costs it may incur as a result of those redemptions or to otherwise eliminate or reduce so far as practicable any dilution of the value of the outstanding securities issued by the fund, the proceeds of which fee will be retained by the fund.

Paragraph (b) states that the requirements of paragraph (a) do not apply to certain funds, among them money market funds and funds that issue securities listed on a national securities exchange, unless they elect to impose a redemption fee under paragraph (a)(1). Paragraph (c)(2) defines a fund as an open-end management investment company that is registered or required to register under section 8 of the Investment Company Act of 1940, and states that the term includes a separate series of such an investment company.

Form N-1A, the registration form used by open-end management investment companies, defines a redemption fee for the fee table in Instruction 2(b) to Item 3 as including a fee charged for any redemption of the fund's shares. The instruction excludes deferred sales charges imposed upon redemption.

How the Fees Are Disclosed

The SEC's guide states that an investor can find a mutual fund's shareholder fees listed in the Fee Table section of its prospectus. The fee table in Item 3 of Form N-1A is captioned Fees and Expenses of the Fund. Its Shareholder Fees section, captioned fees paid directly from your investment, has lines for the Maximum Sales Charge (Load) Imposed on Purchases, the Maximum Deferred Sales Charge (Load), the Maximum Sales Charge (Load) Imposed on Reinvested Dividends, the Redemption Fee, the Exchange Fee and the Maximum Account Fee. Its Annual Fund Operating Expenses section has lines for Management Fees, Distribution and/or Service (12b-1) Fees, Other Expenses and Total Annual Fund Operating Expenses.

Instruction 1(c) to Item 3 directs a fund to include the caption for account fees only if it charges these fees, and states that a fund may omit other captions if it does not charge the fees or expenses covered by the captions. Instruction 2(c) covers the maximum fee charged for any exchange or transfer of interest from the fund to another fund, and Instruction 2(d) directs a fund to disclose account fees that may be charged to a typical investor in the fund.

The SEC's guide tells investors to review carefully the fee tables of any mutual funds or exchange-traded funds they are considering, including no-load mutual funds, and the fees bulletin tells investors to carefully review the fund's prospectus fee table and compare the fund's fees and expenses with those of other investment options.

No-Load Funds in FINRA's Examination Outline

FINRA's Securities Industry Essentials examination content outline carries a 2025 copyright. Section 2 of the outline, Understanding Products and Their Risks, includes topic 2.1.4, Packaged Products. The topic lists the types of investment companies as closed-end funds, open-end funds, unit investment trusts and variable contracts or annuities, and lists knowledge of loads, share classes, net asset value, disclosures, costs and fees, breakpoints, right of accumulation, letter of intent, net transactions, surrender charges and sales charges. The Section 2 rules list includes SEC Rule 12b-1, Distribution of Shares by Registered Open-end Management Investment Company. Candidates should check the current outline before the examination.

Common Misunderstandings

The corrections below come from the SEC's guide and investor bulletins, Investor.gov, FINRA's investor page on mutual funds, FINRA Rule 2341, SEC Rule 22c-2, SEC Rule 12b-1, and Form N-1A.

No-load does not mean no fees. Investor.gov states that a no-load fund may charge fees that are not sales loads, and the SEC's guide states that no-load funds also have annual fund operating expenses.

No-load does not mean no expenses inside the fund. The expense ratio covers the fund's total annual operating expenses, and the classes bulletin states that no-load classes still have ongoing operating costs, such as management fees.

A purchase fee is not a front-end sales load. A purchase fee is paid to the mutual fund, while a front-end sales load is paid to a selling broker.

A redemption fee is not a back-end sales load. The fees bulletin states that a redemption fee is paid directly to the mutual fund, not to a broker, and Form N-1A excludes deferred sales charges from the redemption fee line.

A no-load fund is not necessarily free of 12b-1 fees. The classes bulletin states that retail no-load shares may pay 12b-1 fees, while FINRA states that transaction shares carry none.

No sales charge does not mean no sales commission. FINRA states that although transaction shares do not impose sales charges, a brokerage firm may in some cases separately require the investor to pay a sales commission.

The description of a fund as no load is limited by FINRA rule. FINRA Rule 2341(d)(4) bars members and associated persons from describing an investment company as no load if it has a front-end or deferred sales charge or its total charges for sales related expenses and/or service fees exceed 0.25 percent of average net assets per annum.

The class with no sales load is not always the lowest-cost class. The classes bulletin states that the share class with the lowest initial fees may not be the share class with the lowest fees over time.

Key Points

The SEC's guide states that a no-load fund does not charge any type of sales load, and that it may charge purchase fees, redemption fees, exchange fees and account fees, as well as annual fund operating expenses paid through fund assets.

FINRA states that no-load funds do not impose sales charges but might have other fees.

A purchase fee and a redemption fee are paid to the fund, while a front-end sales load is paid to a selling broker.

The classes bulletin describes retail no-load shares, institutional shares labeled Class I, and retirement share classes as classes with no sales load, and states that retail no-load shares may pay 12b-1 fees.

FINRA Rule 2341(d)(4) bars members and associated persons from describing an investment company as no load if it has a front-end or deferred sales charge, or if its total charges for sales related expenses and/or service fees exceed 0.25 percent of average net assets per annum.

SEC Rule 12b-1 sets conditions for a plan to pay distribution costs from fund assets, and FINRA Rule 2341 sets the percentage limits on the related fees.

FINRA's outline for the Securities Industry Essentials examination lists loads, share classes, costs and fees and sales charges under packaged products.