When it comes to mutual fund 'loads,' little things mean a lot

STAYING AHEAD

June 13, 1994|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

NEW YORK -- As a savvy investor, you probably know that no-load mutual funds are cheaper to own than funds with loads. The "load" is the upfront sales commission, and no-loads don't charge one.

But in certain cases, no-loads can be more expensive -- if they charge above-average annual fees and if you measure over many years. To get the best buy in any class of funds, you have to look for a low fee, too.

Experienced investors shy away from loads. On stock funds, this sales charge starts at about 3 percent for funds classed as low-loads, goes to 5.5 percent for mid-loads and 8.5 percent for high-loads. Contractual plans, which enlist you for monthly investments over 15 or 25 years, might charge an amazing 50 percent in the first year. After that, the load might be 1.7 percent annually on investments of $300 a month, says Don Frizzell of the United Services Planning Association, which sells contractuals.

But the same investors who shun loads might ignore the effect of annual fees. Both load funds and no-loads levy these fees, to compensate their money managers and cover other expenses. There may also be annual 12b-1 fees, that go toward a fund's marketing costs. Within any fund category, some funds charge more and others less.

The annual fees are listed on the first or second page of the fund's prospectus, under the heading "total fund operating expenses." This is also known as the "expense ratio." If you're paying an expense ratio of, say, 1.5 percent, that means the fund charges 1.5 percent of your investment every year. The more years you invest (whether in one fund or in a series of funds), the more your accumulated costs compound.

I asked Bob Edwards, president of the mutual-fund information center Investability Corp. in Louisville, Ky., to compare the effects of the average fees charged by five different classes of stock-owning funds: true no-load funds, mid-loads, high loads, contractuals and fake no-loads. (I call them fake no-loads because, although they charge nothing upfront, they do pay sales commissions to brokers. They recoup that cost by charging you high 12b-1 fees plus exit fees if you sell before seven years or so.)

Edwards assumed that the funds all delivered the same underlying investment performance, fees dictated the different results.

His conclusions:

* For the first 30 years of the projection, the true no-load funds beat all comers. Their average annual expense ratio: 1.21 percent.

* Surprisingly, the contractual funds came in third after 10 years and second for the 20 years after that. Their high sales charge damaged their performance in the early years -- bad news for those who dropped out. But their low annual fee -- averaging 0.82 percent -- made them competitive in the very long run. After more than 30 years of investing, the average contractual even beat the average no-load (still, look how long it took).

* The fake no-loads came in second after the first 10 years and third in the 10 years after that, because investors paid zero upfront. But their high annual fees -- an average of 2.36 percent -- eventually dragged them down. Over 30 years, the fake no-loads came in last.

* The mid-load funds (sales charge, 5.75 percent; average annual fee, 1.41 percent) took more than 20 years to beat the fake no-loads. The high-load funds (sales charge, 8.5 percent; annual fees, 1.35 percent) took more than 25 years.

* True no-loads with below-average fees of 1 percent or less top the charts even after 35 years.

These comparisons lead to some valuable conclusions for investors:

* 1. No-load funds remain the best buy, especially if they charge low annual fees.

* 2. Contractual plans can work out for investors but only if you'll really keep them up for 15 or 25 years.

* 3. On a broker-sold fund, you may have a choice: Either pay an upfront commission and a lower annual fee, or pay no upfront commission, a higher annual fee and an exit fee if you sell too soon. In Edwards' calculation, the second choice was better over 20 years. But for longer holding periods, it made more sense to pay the upfront load.

* 4. Small differences in annual fees matter a lot! It's well worth the effort to save 0.5 percentage points. They're worth thousands of dollars to you, over time.

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