||Ask the Dollar Diva
A load is a heavy burden on
Dear Dollar Diva,
What is a load fund?
A mutual fund that charges a commission is called
a "load fund." Load is another word for sales commission or sales
fee. You usually pay this commission to a financial planner or stockbroker
for helping you select the fund for your portfolio.
Front-end and back-end loads are the most common.
A typical front-end sales commission is about 5 percent
-- you pay it when you buy the mutual fund. If you write out a check
for $10,000 and the sales commission is 5 percent, $500 goes into
the salesperson's pocket. That makes your actual investment $9,500.
Your investment has to earn 5.26 percent to get you back to your
initial $10,000. This isn't going to have much of an impact if you
hold the fund for 20 years, but if you decide to sell it within
a couple of years, it's going to hurt your return.
A back-end load fund hits you with a penalty if you
sell your mutual fund too soon -- usually within six years of the
purchase. Back-end load funds are often classified as "B" funds.
Because nothing is coming off the top when you buy, this kind of
fund is sometimes dishonestly referred to as a no-load. The salesman
gets his commission in other ways -- you get to pick up the tab
with the higher annual fees allocated to your fund. A true no-load
fund has no front-end or back-end load and cannot spend more than
.25 percent of your fund assets on marketing.
The back-end load typically starts at 6 percent if
you sell your shares in the first year and gets reduced by 1 percent
each year you hold the shares thereafter. Your penalty would be
2 percent if you sold your shares in year 5 and 1 percent in year
Load-fund vs. no-load fund
The Diva prefers to have all of her investment dollars
working for her -- she likes no-load funds. A well-informed investor
can pick his own mutual funds. Visit our archives for stories on
mutual funds, do your research, and when you find a fund you're
interested in, call or visit its Web site for a prospectus.
Some of the things you'll find in the prospectus are:
- Fund's objective -- if it's a stock fund,
is it seeking growth, income or both. Is it investing in large
companies or small?
- Fund's holdings -- what are the top 10 companies
the fund is investing in? What industries are represented in the
fund? Do you feel comfortable with the mix?
- Expense ratio -- even if the fund has no
front or back load, it will have other expenses, and these expenses
will reduce the return on your investment. The expenses include
management fees, overhead and 12b-1 fees (sales commissions, advertising
and marketing). The expense ratio should hover around 1 percent,
while 1.5 percent is very high, and more than 2 percent is exorbitant.
- Performance -- how the fund has performed
in relation to its index. If the fund you're looking at consistently
under performs the index, pass it by. The Diva's December 1999
need an index to do the job," explains how to measure a mutual
fund's performance against the appropriate index.
-- Posted: Jan. 19, 2000