Taking a load off can multiply return on your investment

STAYING AHEAD

February 14, 1993|By JANE BRYANT QUINN

New York -- Never has there been a stronger case for choosing a mutual fund yourself, without paying any sales commissions. Although the average upfront sales charge has been coming down, the annual fees charged to fund holders have been going up. The more you pay, the less you net from your investment.

Take the Pioneer Equity Income Fund and the T. Rowe Price Small Cap Value Fund, two stock-owning funds that earned 20.9 percent last year. Pioneer charges an upfront sales fee of 5.75 percent, so its new investors actually netted only 13.9 percent. (You lose more than the actual cost of the upfront fee. That's because you start out with less money invested, so you get less from each compounded gain.)

Of the top 20 stock-owning mutual funds last year, 13 levied upfrontsales charges (also called "loads"), says Bob Edwards of Investability Corp., which tracks mutual fund performance. Adjusting for net performance after loads, only eight funds with sales charges remained in the top 20.

Excluding loads, 14 bond funds made it into the top 20 in 1992; including loads, only eight did. The effect of the load never goes away. If 5 percent was subtracted up front for sales expenses, you'll get 5 percent less money whenever you cash in your shares, Edwards says.

For a list of 125 top-performing growth-and-income (stock) funds, adjusted for loads, send $2 plus a self-addressed, stamped business-size envelope to Investability, P.O. Box 43307, Louisville, Ky., 40253. A list of 125 top-performing bond funds also costs $2.

In both cases, the funds are ranked according to their after-load performance over five years. You're shown one-, three-, five- and 10-year gains, with a list of each fund's sales charges and annual fees.

Some investors are suspicious of no-load funds. "If you don't pay a sales charge," they say, "you'll pay more in annual expenses." That's not correct. True no-loads cost less, any way you slice it.

Mutual-fund charges fall into two general areas: sales loads and annual fees. All funds, both load and no-load, charge annual fees for money management. But only load funds tack on a charge for direct sales expenses. That's because load funds are sold through stockbrokers and financial planners who charge sales commissions. You normally buy no-load funds yourself, after calling a toll-free number to obtain an application.

As for annual fees, they vary from as little as 0.2 percent to more than 3 percent. High-fee funds usually include an annual "12b-1" charge (named after a Securities and Exchange Commission regulation). This charge is used to compensate sales agents.

A salesperson may assert that you're buying a no-load because there's no sales charge up front. But if the fund carries a 12b-1, you're paying the load in another form. So ask about it.

True no-load funds carry no 12b-1 charges. So you pay no sales charge and a lower annual fee.

The loss to you from a costly fund's annual fees compounds over time. Take two mutual funds, one charging 1 percent annually and the other charging 2 percent. Because of that difference, one fund may net 10 percent a year while the other nets only 9 percent. After five years, an investor would earn 4.7 percent more from the lower-cost fund, Bob Edwards says. After 10 years, you'd earn 9.6 percent more, and after 30 years, a big 32 percent more.

Some funds with high costs have also yielded high returns -- for example, the Berger One Hundred Fund, with no upfront load but current annual expenses of 1.89 percent. Yet over 10 years (adjusted for loads), the fund ranks 26 out of 679 funds, Edwards says. Still, that's a rare exception.

For a list of more than 160 stock and bond funds that have absolutely no loads, no way, nowhere (including no 12b-1s), send $3 for the 1993 Membership Directory of the 100% No-Load Mutual Fund Council, 1501 Broadway, Suite 312, New York, N.Y. 10036. The directory also tells you the funds' size, investment objectives, investment minimums, shareholder services and telephone numbers, but no annual expenses. Expenses are listed in a fund's prospectus, right up front.

1993, Washington Post Writers Group

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