Why you should avoid Load Mutual Funds (part 1)

FinanceTrading / Investing

  • Author Michael Saville
  • Published July 11, 2006
  • Word count 682

Load fees do the investor no good whatsover. Any mutual fund is really just a pool of money that's managed to accomplish some particular objective such as income or growth, usually following a particular strategy. A load is simply industry jargon for the commission paid to a salesperson who brings in the money. The commission you pay on a load fund goes only to the salesperson or sales organization, not to the fund's manager or investment adviser. Managers and advisors make their money from fees taken out of the fund's assets. Whether investors pay loads or not, they all pay their share of management costs. The fees are typically 0.5 percent to 1 percent of the fund's assets annually. But sometimes they exceed 1.5 percent.

A load may not give you what you think you are buying. Clued up fund pickers pay a lot of attention to the record and abilities of a portfolio manager. Some fund salesmen say they earn their fees by finding the best managers. But what happens if you get into a load fund with a great manager and that manager leaves to run another fund? At best, you have paid for the track record of a manager who's now gone. At worst, if you decide to follow that manager to a new load fund in a new family, you must pay the load a second time. This doesn't happen all the time. But the best managers are the ones who get new job offers. Think about that the next time you consider investing in a load fund because of its manager.

Every study on the subject has concluded that over long periods of time there is virtually no difference in returns between the performance of all load funds and all no-load funds-except for the sales commission. Specific results will vary a little for every time period, but the pattern is the same year after year, decade after decade. Over the past five years, no-load funds had average total returns of 7.88 percent in bonds and 10.04 percent in equities. Load funds, when you remove the effect of the load, had returns of 8.01 percent in bonds and 9.86 percent in equities.

However, the sales commission has a huge effect. Loads used to be simple, but now they come in many flavours and varieties. A fund's marketing department would say these varieties are designed to give investors more options. However as an investor you might conclude that these varieties are designed to make the sting of the load less obvious.

The presence or absence of a sales commission has absolutely no effect on how well a fund's investments perform. All it does is decide which fund sells its assets at par value and which one charges a premium price. Invest $10,000 in a no-load fund and you have to choose the fund and fill out the form yourself. But your entire $10,000 goes to work for you. Buy a fund with a 5 percent load and somebody else (who will get a big chunk of your money) tells you which fund you should buy and fills out the paperwork for you. And only $9,500 of your money goes to work in that fund.

If these two funds are equally successful in the future, the load fund won't ever catch up. In fact, because of compounding, it will fall farther and farther behind. If the no-load earns a 10 percent return in the first year, the load fund manager would have to earn 17 percent on his portfolio just to get you even with that no-load fund. The irony is that the load fund manager has no incentive to do that. He has no reason to care that you paid a commission. He simply sees you as a $9,500 investor.

You might need your money sooner than you think. Load funds are sold based on a long-term commitment. Salespeople convince investors the commission will represent a small cost when amortized over many years. However, if your circumstances take a turn for the worse and you need to get your money out after a short time you will have lost a lot of money.

For further information on no load mutual funds investing visit my website at http://www.buy-mutual-funds.com where you can apply for my free five part mini course.

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