The Advantage of No-Load Mutual Funds

Jack Piazza

O ne of the basic decisions that every mutual fund investor must make involves the issue of fund structure: whether to choose a load or a no-load fund. Advocates of each type give the following arguments: load funds are necessary to compensate for research and advice; no-load funds save you money by eliminating unneeded expenses.

Let’s first review the different types of mutual fund structures. Load funds charge a commission while no-load funds are commission-free. In addition, the vast majority of all load funds charge annual distribution fees, known as 12b-1 fees, which are used to pay for promotional costs; these costs vary from 0.25% to 1% of annual asset value. Some no-load funds also charge 12b-1 fees, but no-load funds that do not charge 12b-1 fees are known as 100% no-load or true no-load.

The structure of load funds can be (A) front-end. with the commission paid initially and varying from 3% to 6.25% of the investment; 12b-1 fees in front-end load funds are usually 0.25% or (B) back-end or contingent deferred sales charge, with the commission paid when the fund is sold and beginning at 5% of the value of the fund and declining 1% per year until zero after year five; 12b-1 fees in back-end load funds are usually 1% and convert to 0.25% after five years or (C) level load. with the commission paid initially and usually equal to 1% of the investment; 12b-1 fees in level load funds are 1% for as long as you own the fund.

Is there really that much of a worthwhile difference between load and no-load funds? An analogy to comparing mutual fund structures would be a one-hundred yard race. If the race competitors have equal ability, but one has a five to six yard head start, you obviously know who would win the contest. In fact, the one with the head start would only lose to a competitor with far superior ability. In the mutual fund illustrations below, assume all competitors have equal ability in order to accurately demonstrate the differences in performance.

Assuming a $10,000 investment with a conservative 9% annual net return rate — after annual fund operating expenses of 1% — over three years, the following illustrations compare the differences in cumulative total return and Return on Investment (ROI) among four different types of mutual fund structures:

• 100 % no-load (no 12b-1 fee)
• 5.75% front-end load with 0.25% per year 12b-1 fee
• 3% back-end load with 1% per year 12b-1 fee (sale at end of year 3 )
• 1% level load with 1% per year 12b-1 fee

Fund Structure — Cumulative Return Comparison