Mutual fund load fees are fees that you pay to invest in mutual funds. Of course all mutual funds have management fees that are assessed on your investment each year (read about 12-b1 fees). Load fees are a different fee, though, one that you pay just for investing in a fund.
Mutual Fund Loads
When you buy a mutual fund, you usually pay no fee if you pick a no-load fund. A no-load mutual fund is a mutual fund that only charges fees for management and marketing in some cases.
Here’s how mutual fund load fees work: you invest in a mutual fund and then the fee is deducted from how much you invest.
Suppose you invest $10,000 into a mutual fund with a 3% mutual fund sales load. When you receive your first account statement after your initial deposit, your mutual fund balance will be $9,700. The $300 fee went to pay off the person who sold the mutual fund to you. In some cases, loads also go to the mutual fund company.
The long term cost of a mutual fund is very high. If your mutual fund earns 8% per year for 40 years, then the $300 load that you paid will have cost you more than $6000 in future dollars. This means that the growth you could have had on the money that you paid in the fee was monstrous!
Index funds are better than mutual funds
Index funds do not have typical mutual fund fee arrangements. You pay only for the management fee, which is quite low because there is no active manager of the fund. Always buy index funds if you can, because the fee difference will increase the returns on your investment.
Remember, fees are the killer of fund returns. The lower you can get your fees, the higher your returns will be over the very long term. Check out my post on how to compare fund fees for free.
One thing that consistently annoys me is the difficulty in finding the annual expense for any given group of funds. I wanted to talk about comparing fees for mutual funds and ETFs.
Comparing Mutual Fund Fees
Mutual funds are the worst as they like to:
- Promote different share classes – I am convinced that A-, B-, C-, etc., share classes of mutual funds exist simply to complicate comparison shopping by investors. Mutual fund companies that sell loaded versions of their funds are the worst – as are funds that have 12b-1 fees on some share classes but not others.
- Obscure the costs of the fund – Mutual funds can pack additional fees by charging purchase fees (which go to the fund company), contingent deferred sales load, and the infamous “other expenses.”
There are a few companies out there dedicated to comparing and rating mutual funds and their managers. Morningstar is one of the best known, but a subscription costs nearly $200 a year. Go for the free option at MarketWatch, which will let you compare up to 4 funds for free.
My favorite tool is Yahoo’s free mutual fund screener. You can sort by fees including front-end loads and total annual expense ratios.
What if you want to compare exchange-traded funds? No problem! The ETF community is all about saving money, and there are great free tools available to examine ETFs. Personally, I like ETFs because the fee is plainly-stated as an all-in expense ratio. Unlike mutual funds, there is an on-going fee war in ETFs that is pushing down costs to a ridiculously low level. I’m not sure how these companies even make money.
Anyway, if you want to compare ETFs, check out ETFdb. I like to use their ETF screener to select funds based on the asset allocation, management type, and then annual expense. You can then do sort funds again by expenses to see how they line up. Work your way down the list to find a fund that works for you.
Hey, check that out – ETFdb even points you to brokers where you can trade the fund commission-free. How’s that for saving you money?
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