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.

Table 14-4
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 determined.
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 answers are
* 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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