Loads and other fees do add up--and they smart the most when returns are low.
Do your mutual funds charge sales loads? Probably, if you bought them through a commission-based broker or financial adviser, rather than directly from a mutual fund company or through a "supermarket" like Charles Schwab & Co.'s Mutual Fund OneSource.
Those costs were easier to ignoreand affordduring the bull market, when double-digit returns seemed almost commonplace. But now, with so many funds still in negative territory, you may want to rethink paying anything extra to invest. Paying a load doesn't necessarily get you better returns, lower operating costs, or access to brighter stock pickers. Loads come in several varieties:
Front-end (initial): As the name implies, this commission is charged up front when you buy shares. It can run from 1 to 8.5 percent of the amount you invest and is subtracted directly from your initial purchase. So if you put $5,000 into a fund that has a 5 percent load, you're actually investing only $4,750 after commissions. Shares that charge front-end loads are usually known as "A shares."
Back-end (deferred): "B shares" typically assess a declining load for each year you stay in the fund. You pay the load when you sell. That may sound better than a front-end load, but the fund company compensates the broker in other ways, usually by jacking up its 12b-1 fees. Named after a section of the Investment Company Act of 1940, these fees primarily cover marketing and distribution expenses. They're passed on to you in the form of lower share prices.
Level: More sleight of hand. With "C shares," you may be charged a low or "discounted" front-end load, but you'll also pay an annual sales feetypically about 1 percent. That makes C shares worth considering only if you plan to cash out within a year or two. Otherwise, you're probably better off purchasing A shares and paying the commission up front.
Trailing: After paying a full front-end load, you may be assessed a smaller annual fee of no more than 0.25 percent. Officially called a "service" fee, it's hidden within the 12b-1 charge. It compensates the broker for giving you advice and answering your questionsa good deal for him, but a bad one for you. If a fund's 12b-1 fee exceeds 0.75 percent, the extra represents the service fee.
Loads aren't the only charges you pay for the privilege of investing. All mutual funds charge annual fees for management and other costs associated with operations. These fees, which erode your return, are reported collectively as an "expense ratio"the percentage of the fund's total assets used to pay those costs annuallyand they vary significantly from fund to fund. So while you're considering investment costs, compare your funds' expense ratios with those of similar funds. You can use a source such as Morningstar Mutual Funds, which may be available in the library, or by visiting www.morningstar.com .
Diane Weber. Fund fees: Do you pay too much?.
Jul. 11, 2003;80:72.