Load Funds versus No-Load Funds
A no-load fund is a fund whose shares are sold without a sales
charge. In other words, you do not pay any fees to buy or sell
shares in the fund. With an investment of $10,000 in a no-load fund,
every cent of the $10,000 is used to buy shares in the fund. No-load
funds sell directly to investors at the NAV per share.
A load fund is a fund whose shares are sold to investors at a
price that includes a sales commission. The selling price or offer
price exceeds the NAV. These fees can be quite substantial, ranging
to as much as 8.5 percent of the purchase prices of the shares. The
amount of the sales (load) charge per share can be determined by
deducting the NAV price from the offer price. Table 14–4 illustrates
how to determine the effective load charge of a fund. Some funds
give quantity discounts on their loads to investors who buy shares
in large blocks. For example, a sales load might be 5 percent for
amounts less than $100,000, 4.25 percent for investments between
$100,000 and $200,000, and 3.5 percent for amounts in excess of
$200,000. Investors buying load funds need to determine whether
a load is also charged on reinvested dividends.
Funds also can charge a back-end load or exit fee, which affects
investors selling shares in the fund. A back-end load is a fee
charged when shareholders sell their shares. The back-end load can
be a straight percentage, or the percentage can decline the longer
the shares are held in the fund. For example, if you sell $10,000 in
a mutual fund with a 3 percent back-end (redemption) fee, you
only receive $9,700 [10,000 - (0.03 * 10,000)].
The ultimate effect of a load charge is to reduce the total
return. The effect of a load charge is felt more keenly if the fund is
held for a short time. For example, if a fund has a return of 6 percent
and charges a 4 percent load to buy into the fund, your total
return for the year is sharply reduced. If you must pay a back-end
load to exit a fund, this charge could be even more expensive than
a front-end load when the share price has increased. This is so
because the load percentage is calculated on a larger amount.
How to Determine the Effective Load Charge
A mutual fund quotes its load charge as a percentage of its offer price, which understates
the real charge paid by investors in load funds. For example, for a mutual
fund with a load charge of 5 percent and a NAV as quoted in the newspapers
of $25 per share, the load is based on the offer price, which must first be
Offer price = NAV/(1 – load percent)
= $25/(1 – 0.05) = $26.32
The investor pays a load fee of $1.32 per share ($26.32 – $25.00), which is a 5 percent
charge of the offer price. However, this load charge as a percentage of the
NAV is higher than 5 percent.
Effective load charge = load charge/NAV
= $1.32/$25.00 = 5.28 percent
You should not be fooled by funds that tout themselves as
no-load funds and assess fees by other names that come right out
of investors’ pockets like loads. These fees are not called loads, but
they work exactly like loads. Their uses are to defray some of the
costs of opening accounts or buying stocks for the fund’s portfolio.
The fees vary from 1 to 3 percent among the different fund groups.
From an investor’s point of view, the lofty purpose of these fees
should not matter. They reduce the amount of the investment.
Why, then, do so many people invest in load funds when the
commissions eat away so much of their returns? Some possible
* Investors do not want to make decisions about which funds
to invest in, so they leave those decisions to their brokers
and financial planners.
* Brokers and financial planners earn their living by selling
investments for which they are paid commissions. These
investments include only load funds and funds that pay
commissions out of 12(b)–1 fees. These funds are promoted
as the best ones to buy.
* No-load funds and funds that do not pay commissions to
brokers and financial planners are not promoted or sold by
brokers and financial planners.
No evidence exists to support the opinions expressed by many
brokers and financial planners that load funds outperform no-load
funds. According to a study on the long-term performance of mutual
funds, there was no statistical difference between the performance
of no-load funds and load funds over a 10-year period (Kuhle
and Pope, 2000). However, after adjusting for sales commissions,
investors would have been better off with no-load funds.
A 12(b)–1 fee is a charge a mutual fund can take from investment
assets to cover marketing expenses. A12(b)–1 fee is less obvious
than a load. This type of fee is charged by many funds to
recover expenses for marketing and distribution. This type of fee,
assessed annually, can be steep when added to a load fee. Many noload
funds boast the absence of sales commissions and then tack on
12(b)–1 fees, which resemble hidden loads. A 1 percent 12(b)–1 fee
might not sound like much, but it results in $100 per year less in
your pocket on a $10,000 mutual fund investment.
In addition to the above-mentioned charges, funds have
management fees that are paid to the managers who administer the
portfolio of investments. These fees can range from a 0.5 to 2
percent of assets. High management fees also take a toll on an
investor’s total return.
All fees bear watching because they reduce yields and total
returns. Critics of the mutual fund industry have cultivated a sense
of awareness regarding the proliferation of these charges. Indeed,
do not be deceived by funds that claim to be what they are not.
Lowering or eliminating front-end loads doesn’t mean that a fund
cannot add fees somewhere else. Many new funds waive some of
their fees. Check to see whether and when these waivers are set to
expire or whether they can be revoked.
A fund has to disclose its fees. You can find management fees,
12(b)–1 fees, redemption fees (back-end loads), and any other fees
charged somewhere in the fund’s prospectus.
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