You
could be losing money from your investments and not even be aware of
it. Mutual funds loads are just another way of saying sales commission.
These commissions can be significant.
Loads are the most talked about fees that mutual funds charge. A "load"
on a mutual fund is just another way of saying that the fund charges a
sales commission for purchase, sale, or both. There are funds that
charge loads and there are funds that do not charge loads (known as
"load funds" and "no load funds" respectively).
Front-end loads are sales commissions that are paid up front at the
time of your purchase. So, if you give a fund a $10,000 investment and
it charges a front-end load of 5%, then the fund will take 5% of your
investment (that's $500) and pocket it right away. Only what is left
over after the load has been deducted will be invested into the fund
(in this example, only $9,500 is invested in the fund from your initial
$10,000 investment)
Back-end loads charge their sales commissions when you sell (or
"redeem") your shares. So, when you go to redeem your shares in a fund
with a back-end load you will end up receiving whatever money the
shares are worth minus the sales commission.
Mutual funds charge management fees in order to pay for the management
services used to run the fund. In other words, these fees are used to
pay the salaries of the fund's managers and analysts. Management fees
usually do not amount to more than one percent of the fund's assets,
and they are significantly lower for passively-managed funds, such as
index funds, than for actively-managed ones. You should remember that a
high management fee in no way guarantees a more skilful management team.
Front loads can be reduced if you are investing or planning to invest a
certain amount of money. The load reduction schedules are called
"break-points." For example, with most fund companies if you are
investing over $100,000 or plan to within the next 13 months, you will
get a 1% reduction on the front load. The more you invest, the greater
the reduction in the load. For some fund companies the break-point
reduction begins at $50,000 over 13 months, and with many funds, if you
invest over $2 million there is no front load.
If you do not have $50,000 or $100,000 to invest over the next 13
months, you can still earn a reduction on the front load, through
"rights of accumulation." Under accumulation rules you will receive fee
reductions on the front load when your total investments with one fund
family have grown past the break points. Therefore, if you only have
$20,000 to invest today, that's OK, someday soon it will grow past the
$50,000 or $100,000 initial break-point and you will be eligible for
the load discount on your further investments.
The turnover ratio for a mutual fund can provide you with useful
information about how expensive a fund is and how it is managed.
Turnover ratios measure the amount of trading activity in the fund's
portfolio. They are calculated by taking all of the fund's sales for a
specified period of time (usually one year) and dividing by the fund's
total assets. This number tells you how much the fund's portfolio has
changed.
You probably will want to exercise caution when investing in a fund
with a high turnover ratio. High turnover means that the fund's manager
is buying and selling very often, and, since every sale and every
purchase involves a commission, this means that funds with high
turnover ratios often have high expenses. Some experts recommend
focusing on funds whose turnover ratio is less than 50%.
