No-load mutual funds may have lower expense ratios than load mutual funds for which of the following reasons?

The correct answer highlights a specific regulatory restriction that can impact the overall cost structure of no-load mutual funds compared to load mutual funds. No-load funds are not permitted to charge a 12b-1 fee that exceeds 25 basis points, which is a fee used to cover marketing and distribution costs. This limitation helps keep the overall expenses of no-load funds lower, which can lead to a lower expense ratio than that of load funds that may not have similar constraints.

While both load and no-load funds incur various operational costs, the absence of a sales commission and the regulatory constraints on fees contribute significantly to lower expense ratios in no-load options. By ensuring that 12b-1 fees remain capped, no-load funds can often pass savings along to investors, making them more cost-effective over time, especially for those looking to minimize fees associated with their investments.

On the other hand, the other statements about no-load funds can be misleading. The assertion that no-load funds cannot invest in stocks is incorrect, as they can indeed invest in various asset classes, including equities. Furthermore, while no-load funds do minimize sales commissions, this is not the complete rationale for their typically lower expense ratios. Lastly, the claim about diversification lacks relevance to expense ratios since