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# Load or No-Load Mutual Funds?

A load mutual fund charges a sales commission for buying shares in the fund. These charges can be front-ended, back-ended, or both and can be quite substantial, ranging to as much as 8 percent or more of the purchase price of the shares. The amount of the sales charge per share (the load) can be determined by deducting the net asset value (NAV) price from the offer price. Conversely, some mutual funds are no-load funds, meaning that the investor pays no commission or fee to buy or sell the shares of the fund. For example, when investing $50,000 in a no-load fund, the entire investment goes toward buying shares in the fund. An investor can easily determine whether a fund has loads or not by examining its prospectus.

A front-end load is deducted from the funds invested. Using our example above, if the same $50,000 were put into a fund having a 5 percent load, the $2,500 load charge would be immediately deducted from the investment principal, leaving $47,500 with which to buy fund shares. Some funds also charge a back-end load, or exit fee, when shares of the fund are redeemed (sold back to the fund). This fee can be a flat percentage, or it may decline the longer the shares are held.

Regardless of when they're applied, the ultimate effect of load charges is to reduce a fund's total return. The impact of load charges is felt more acutely if the fund is held for only a short period of time. For instance, if a fund has a yield (the annual rate of return) of 6 percent but there's a 4 percent front-end load to buy into the fund, the total return to the investor for the year is sharply reduced. If there's also a back-end load to exit the fund, even more of his or her return will be eroded. If the share price has increased, the load percentage will be calculated on the larger amount.

There is no evidence to support the opinions expressed by many brokers and financial planners (many of whom earn commissions from selling load funds) that load funds outperform no-load funds. Indeed, after adjusting for sales commissions, investors are often better off with no-load funds. When considering the fact that a load fund would have to outperform a no-load fund for a number of years in order to recoup the initial load deducted from the investment amount, this would seem to make sense. Consequently, it's much more difficult for load funds to outperform no-load funds when the range of returns earned by bond funds in general is not particularly wide.

12b-l fees, which are charged by many funds to recoup expenses for marketing and distribution, are less obvious than loads. These fees are usually assessed annually and can be quite steep when combined with load fees. Some no-load funds flaunt the absence of sales commissions but add on 12b-l fees, which are in essence a hidden load.

All fees should be carefully considered, since they reduce yields and total returns. Lowering front-end loads or eliminating them altogether doesn't necessarily mean that a fund hasn't added fees somewhere else. However, all fees must be disclosed in the fund's prospectus. Management fees, 12b-l fees, redemption fees (which are back-end loads), and any other fees charged should be made known somewhere in the prospectus. Financial newspapers also list the charges of the different funds included in their periodic mutual fund performance reviews.

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