In last month’s Wisconsin Energy Cooperative News, I focused on “no-load” mutual funds and the importance of determining how much you are really paying in mutual fund expenses because it will make a tremendous difference on how much you really earn on your invested funds.
This month I turn my attention to “load” mutual funds. Load funds also charge fees. Some of the fees are paid up front based on the total amount you are investing and some fees are paid for part—or over the life of—your investment. These fees eat into your returns and should be a very important consideration when investing your hard-earned funds.
There are generally three different types of “load” funds. First, there are “A” shares where you pay your broker an up-front sales charge, or load, that is subtracted from your up-front investment. The loads usually are reduced the more you invest. Second, there are “B” shares where you do not pay an up-front sale charge. However, the mutual fund company pays the broker’s commission and you then pay the mutual fund company the amount of the commission over time through higher fees. The redemption fees falls the longer you keep your investment. Third, there are “C” shares that usually do not charge an up-front sales or redemption fee. In return, you are charged higher annual costs for the life of your investment.
Add to this the so-called “break points” where you receive certain up-front sales discounts or price breaks depending on how much you have invested.
Confused? Unfortunately, many Americans are confused about load funds. Hopefully your broker remembers you are paying fees for advice, and that advice should direct you towards the lowest-cost shares. Furthermore, your mutual fund prospectus is required to illustrate the impact different share-class fees will have on a $10,000 investment over various time frames. The prospectus must also list, but unfortunately does not demonstrate, the impact of break points.
According to the Wall Street Journal, mutual funds offer brokers marketing materials that outline the advantages of one share class over another, but this material isn’t normally provided to investors. I have found my own broker to be quite willing to work through the math with me, but I have heard from other consumers that their broker provided little or no explanation before they invested. You may need to investigate fees on your own. The National Association of Securities Dealers (www.nasdr.com/FundCalc/expense_analyzers.asp) and the Securities and Exchange Commission (www.sec.gov/investor/tools/mfcc/mfcc-int.htm) provide fund cost calculators. Both sites also helpfully allow you to check to see whether any regulatory or disciplinary action has been taken by the federal or state government against your broker.
Next month, I plan to discuss unauthorized buying club charges on credit card accounts.