By Deborah Rankin

Published: January 8, 1984

PURCHASERS of some mutual funds are finding that less of the money they put up is being invested for their benefit and more is being used to defray the funds’ own marketing costs. Taking advantage of the big run-up in the stock market last year, many of the hottest funds have instituted a variety of new charges.

Several funds that were historically »no-load» — and thus sold without an initial sales charge — are now »low load» funds charging investors upfront purchase fees of 2 or 3 percent, which typically go to fund management companies. Some funds are increasing the fees they pay to those management companies, which provide investment advice and offer administrative and marketing services — functions they, in turn, often delegate. Other funds have instituted »redemption» fees of up to 4 percent, which flow back into the funds themselves and are paid by investors who liquidate their holdings before a certain period has elapsed. And still others have taken advantage of a 1980 Securities and Exchange Commission rule and are using a portion of fund assets to pay for distribution costs, such as the mailing of prospectuses and answering telephone inquiries.

All of this has led to a blurring in the distinction between »no-load» and »load» funds, and questions have been raised as to whether some funds are trying to put something over on investors. After all, isn’t a load by any other name still a load? And might not ongoing hidden charges cost people more in the long run than a single, straightforward 8.5 percent »load» charge imposed right from the start?

The main reason for the proliferating charges can be summarized in one word: marketing. As their numbers mushroomed in a fiercely competitive market, many funds have stepped up their efforts to maintain existing investors and to woo new ones. The result, said A. Michael Lipper, president of Lipper Analytical Services, a New Jersey firm that tracks mutual fund performance, is that »distribution costs are rising, and people are going to pay for it one way or another.»

But, he added, a fund’s investment philosophy and performance, not the presence of a load, should be the major factors in selecting a fund.

One revenue-raising approach adopted by several funds is to become »low-load.» Instead of selling themselves to the public with no charges at all, these funds are imposing modest sales charges that are somewhat lower than the 8.5 percent fees imposed by most load funds. The most notable move in this direction has been taken by the Fidelity Group in Boston. In November 1982, it increased the load on its popular Magellan Fund, which opened in 1966 as a no-load, to 3 percent from 2 percent. Fidelity’s Mercury Fund, a no- load last year, now also carries a 3 percent load.

Last June, Fidelity began charging investors in its Select Portfolios, a group of six funds specializing in areas such as energy and technology, a 2 percent fee when they invest and another 1 percent fee when they sell. Last November, Fidelity also imposed a 2 percent load on its Equity Income Fund, a conservative growth and income fund. And it plans a new fund, Fidelity Special Situations, at a 3 percent load. »The distribution costs associated with marketing these funds are higher than the costs of marketing fixed-income products, particularly money market funds,» said Rab Bertelsen, a vice president of Fidelity group. »What the low-loads are doing is helping Fidelity to get the word out. But we’re not going to go from 2 percent to 3 percent to 4 percent to 5 percent and see what the public will bear.»

Last May, the Alliance Technology Fund, in a move to seek more individual investors, dropped its no-load status and imposed a full 8.5 percent load as an incentive to brokers to sell their fund shares. Much of the load goes, as commissions, to the retail brokers who make the sales.

»Instead of paying money for advertising, we’re paying money to the brokers at Merrill Lynch,» said Jon Fossel, director of marketing.

Another way that funds can raise marketing

dollars is to adopt what is known as a 12b-1

plan, named for the S.E.C. rule that permits them to deduct a certain amount of distribution expenses from fund assets. Instead of paying an upfront load to cover these expenses, investors in such funds pay an ongoing charge for marketing.

The Vanguard group started this ball rolling in 1980, when it asked for permission to use part of the fund family’s assets for marketing expenses (although Vanguard’s plan works like a 12b-1, it technically is not one). More than 130 funds have followed suit and last summer, the giant Investors Diversified Services group was granted permission to use fund assets in a similar manner.

But the S.E.C. has some misgivings about the use of 12b-1 plans. »Our fear is that they’re spending too much,» said Gerald Osheroff, an associate director of the S.E.C.’s Divison of Investment Management. While the rule itself does not specify any maximum amount of assets that can be spent on distribution costs, he said, some funds are spending over 1 percent »and I don’t think anybody envisioned expenditures of that magnitude being made» when the rule was adopted.

The Keystone group has tried a different approach. In an attempt to stem redemptions, the group dropped its 8.5 percent load on 10 of 21 funds last June and substituted a 12b-1 plan that allows up to 1.25 percent of new money flowing into the funds to be deducted for marketing expenses. Keystone also imposed a sliding redemption fee, ranging from a maximum of 4 percent for new investors who sell within the first year to zero for sales in the fifth and subsequent years.

George S. Bissell, president of Keystone, said there has been very little negative reaction from investors and that fund sales have increased more than threefold. But critics maintain that old shareholders who already paid an 8.5 percent load are penalized to the extent that the 12b-1 plan could impose additional, ongoing charges.

While various studies have shown there is no correlation between fund performance and sales charges, the United Mutual Fund Selector, a financial newsletter, noted that load funds must do better than no-load funds just to compensate for the sales fee. A $10,000 investment in a fund with an 8.5 percent load results in a sales charge of $850 and only the remaining $9,150 is left to work for the investor.

But the funds that turn in the best performances are the ones likely to have the nerve to impose sales charges. »They’re the only ones who can successfully get away with it,» and charge a load without losing investors, said Mr. Lipper.