No Free Lunch: Load Funds Vs. No Load Funds
Everyone wants to save a buck. So if you had a choice between a fund that charged you every time you bought new shares, and one that didn’t, which would you choose?
The answer sounds obvious, but there’s more to evaluating the cost-efficiency of a mutual fund than this one fee.
A load is simply a sales fee charged you for purchasing a fund. It can range from less than 1% of purchase price to higher. Front-loaded funds levy their loads at the time of purchase. Back-loaded funds collect their fees upon redemption. A no-load fund does not charge a fee for the purchase or sale of shares.
There’s no free lunch, of course. Load or no load, funds can charge multiple fees to recoup their costs and pay for their services.
Funds that impose 12b-1 fees to recover marketing and distribution costs deduct them from fund assets on a yearly basis. The Securities and Exchange Commission caps the 12b-1 at 1% of fund assets. Management fees are calculated as a percentage of assets, and they often tend to decline as a fund’s assets grow.
What matters to you is the total effect of all fees. For that, factor in loads, plus a prospective fund’s annual expense ratio, which reflects that total impact of all other fees as a percentage of assets. The annual expense ratio should decline as a fund’s net assets grow, enabling the fund to spread costs over a wider asset base.