Flipping Rich

derrikd 19 April 2007 investing, sunny speaks 229 views 2 Comments

A load is a sales commission you either pay upfront (example: A shares) or back-end load on a decreasing scale (example: B shares).   It’s a general misconception that no-load funds are better because there’s no commission upfront to the investor.  I would challenge the no-load theory. You should question why some funds have loads and some funds don’t. Like the old phrase “there’s no such thing as a free lunch” or “if it sounds too good to be true, it probably is”. Anyway, two things to consider besides loads — fund expense ratio and performance.

Expense Ratio — although there’s no upfront or back-end sales charges with no-load funds, however, the funds’ expense ratios could be high that would eat away bottom line performance for investors. Sometimes, fees disclosed in prospectus may not include asset-based fees (fees that you pay every year based on the value of your account), trading costs, transfer agent’s fees, marketing, etc… There are certain fixed costs to run a mutual fund just as you would with any types of business. Those fees have to come from somewhere and certainly the mutual families are not eating them because they’re in the for-profit business and looking for shareholder value.  Below are examples of typical expenses ratios of any given mutual fund:

·         Management fees – portfolio managers’ service and investment selection, buy/sell discipline
·         Redemption fees – designed to discourage investors from making frequent redemptions, are charged when you sell mutual fund shares

·         12b-1 fees – charged to pay for advertising, sales expenses (typically a financial advisor’s trailing payout)

·         Reinvestment fees – fees charges for reinvest capital gains & dividends distributions into the fund

·         Exchange fees – when you switch from one fund to another within same mutual fund family

·         Custodial fees – are charged by the custodian (a financial institution holding the fund assets in-house) for the service it provides

·         Administrative fees – everything from rent to shareholder services

Performance — some no-load may have competitive total returns compare to benchmarks and/or peers. However, lots of no-load lag. So don’t lose sight of your original goal to make money.

 All things being equal, you want to avoid unnecessary charges whenever possible.  Believe me, Derrik and I have no shame to admit that we are bargain hunters.  The bottom line in any investment is how it performs for the investor, and that performance includes consideration of all commissions, fees, and expenses.   Just do your homework.