No-load Fund

A fund's sales charge is also known as the:

1. A.SpreadThe dollar difference between NAV and POP is loosely described as a spread, so the association is understandable. In dealer markets spread means the gap between bid and ask, while the industry term for a mutual fund's sales charge is the load.
2. B.LoadCorrect - sales charge = load.
3. C.Basis pointA basis point is a unit of measurement, one hundredth of one percent, and fund fees are routinely quoted in them. Measuring a charge is not the same as naming it; the sales charge itself is called the load.
4. D.CouponA coupon is the stated interest a bond issuer pays to the investor, money flowing toward the customer rather than away. The charge a fund investor pays to buy shares is the load.

Why: The sales charge is commonly called the load; a fund without one is a no-load fund.

Delia Okonjo notices that the Marston Equity Fund quotes a public offering price of $18.42 and a net asset value of $18.42, and its prospectus shows a 0.20% 12b-1 fee. A no-load mutual fund:

1. A.Always outperforms load fundsAvoiding a sales charge does leave more money invested from day one, so the cost advantage is genuine. Results still depend on what the portfolio owns, and a well-managed load fund can outperform a no-load one; the word always is what makes this false.
2. B.Cannot be redeemedWhether a fund charges a load has nothing to do with redeemability. A no-load fund is still an open-end investment company, so it stands ready to buy shares back at the next computed NAV.
3. C.Charges the maximum 8.5% loadThis states the direct opposite of the term. A fund charging the maximum permitted load is the most heavily loaded fund the rules allow, while a no-load fund sells shares at NAV with no sales charge.
4. D.Sells shares at NAV with no sales chargeCorrect - no front or back load.

Why: A no-load fund sells shares at NAV with no sales charge (and any 12b-1 fee is 0.25% or less).

A client who does not want to pay any sales charge should be shown:

1. A.A Class B shareClass B collects nothing at the register, which is why it can be presented as avoiding a sales charge, and that presentation is a recurring compliance problem. The charge is still there: a higher annual 12b-1 fee runs throughout, and a contingent deferred charge applies if the client sells within the schedule.
2. B.A no-load fundCorrect - no sales charge.
3. C.A front-end load fundA front-end load is deducted from the deposit before shares are purchased, so the client pays the charge immediately and visibly. This is the clearest contradiction of the stated preference on the list.
4. D.A Class A load fundClass A carries a front-end load, and breakpoints reduce that charge without eliminating it. A discount is not the same as an absence, and the client has asked to pay nothing rather than to pay less.

Why: A no-load fund is sold at NAV with no sales charge.

The public offering price of a no-load fund equals:

1. A.NAV plus 8.5%8.5% is the highest sales charge a fund may add to NAV, and it is being applied here to a fund that adds nothing. The maximum only constrains funds that impose a load; a no-load fund sells at NAV, so POP equals NAV.
2. B.Its net asset value (NAV)Correct - no load means POP = NAV.
3. C.Twice the NAVNo sales charge structure produces a price at twice net asset value; that would be a 50% load. The offering price of a fund is NAV plus whatever sales charge applies, and for a no-load fund that addition is zero.
4. D.NAV plus a 12b-1 feeThere is something right here: a fund can charge a modest 12b-1 fee and still be sold as no-load. But a 12b-1 fee is an annual expense deducted from fund assets, not an amount added to the purchase price, so it never appears in the POP calculation. POP still equals NAV.

Why: A no-load fund sells at NAV, so its POP equals its NAV.