Loads, fees and mutual funds
Mutual Fund A wants to charge you a "load" -- a percentage
of your investment for the privilege of doing business with them,
assessed before they have a chance to prove you'll get your money's
Mutual Fund B is a "no-load" fund -- one that does
not impose an upfront cost.
The choice is simple, right?
Not always. Performance and fees -- expense ratios,
12b-1 fees, and more -- make the comparison more complex.
So, to begin comparing load and no-load mutual funds,
you'll need to get up to speed on the many fees which can erode
the overall rewards of your stated total return.
To fee or not to fee
No matter what anyone tries to tell you, loads and
other types of fees make a difference -- sometimes a big one. True,
a pure no-load fund with low expense fees won't guarantee you a
better overall return, since stock selection dramatically affects
the overall performance of a fund. However, all things being equal,
if you invest $10,000 in a 4 percent load fund that turns in a 10
percent performance for the year, you earn the 10 percent, but not
on $10,000. Instead, you earn 10 percent on $9,600. That's $400
short of a no-load fund investor. Over time, the impact of this
can be considerable.
However, there's another twist. Just because a fund
says it's "no-load" doesn't mean that there are no fees associated
with it. There may be a redemption fee, and every fund charges management
fees in one form or another. The trick is to find the funds whose
fees are more reasonable than others and whose performance still
shines relative to its objective, its peers, and your needs. To
do this, you need to do your homework -- a task made easier by learning
the following ways in which a mutual fund's fees can siphon off
your investment dollars.
Load. A load is an upfront sales
commission charged and deducted from your initial investment
amount. (Load charges run as high as 8.5 percent but are more
commonly in the range of 3 percent to 4.5 percent.)
No-load. No-load means no initial
sales commission fee. No-load refers only to upfront sales commission
charges. Many no-load funds have other fees (listed below).
Back-end loads. Also known as "redemption
fees," this is a fee charged to the net asset value (NAV) of
your shares when you sell them. Either your profit is cut or
your loss increased.
Deferred loads (contingent deferred sales
fees). A deferred load is charged by some funds only if
you redeem your shares before a specified time -- typically
a few years. This makes these funds a poor choice if you're
investing for the short-term.
Reinvestment loads. Some fund companies
dock your dividend, interest and capital gains should you decide
to reinvest them. Any fund that does this is discouraging a
very wise investment choice -- reinvesting dividends.
12b-1 fees. Some funds deduct the
costs associated with advertising and marketing themselves from
the fund's overall assets. The charge associated with such deductions
is called a 12b-1 fee, and ranges as high as 1.25 percent. Some
funds feed a portion of the fee to the broker who sold you the
Loads vs. no-loads
There's compelling argument for no-loads over loads
-- more of your hard-earned money goes to work for you right from
the start in a no-load, all things being equal.
Of course, if you don't know what you're buying, you
are putting your head into a lion's mouth before making certain
he's not hungry. Load funds recognize that by touting themselves
as advice givers who can educate novice investors. However, many
of today's no-load funds offer education, too -- check out Fidelity's
PowerStreet.com or Vanguard's Online University.
There is one point in the above argument worth keeping
in mind. It's easy to forget that a no-load's fund fees can and
often do add up -- and often can surpass the level of the no-load
advantage. But you should also note that simply investing in a load
fund often means that, if done through a broker, you'll likely be
charged some sort of fee -- not to mention the fact that the fund
itself will have its own fee baggage beyond its load.
There are a few good load funds that have delivered
some of the lowest-priced funds over the long term, because operating
fees are low. There are also load funds that have delivered superior
performance -- enough to justify the load. And remember, some no-loads
have whopping expense ratios; anything above 2 percent is egregious.
So it's not a perfect world -- you can find abuses on both sides.
-- Posted: May 1, 2000