How to Compare Load to No-Load Mutual Funds

Death, taxes and a spouse with annoying little habits -- the only real guarantees in life. While investing your cash is generally a wise move, it can be a risky proposition. In addition to losing money, you have other going concerns. For instance, you might end up comparing load to no-load mutual funds. Mutual funds that charge a load assess a fee -- a percentage of your investment -- either when you buy or redeem shares to pay brokers who market and sell their funds.

Access a mutual fund screener, such as the one at Morningstar's website. Morningstar also allows users to compare funds. While you can request and weed through mutual fund prospectuses, the process is time-consuming as well as a waste of paper and postage. The information you need, even entire prospectuses, is all online.

Pull up the information for the funds you wish to compare. With Morningstar's free Fund Compare service, you simply enter the ticker symbols of the funds you want to compare. If you don't know the ticker symbol, use the symbol lookup feature. Clearly, there are literally thousands upon thousands of possible comparisons. And you can find mutual funds with loads that are superior to no-load products. Proceed on a case-by-case basis.

Make fair comparisons. Don't compare a global stock fund with a short-term bond fund. Or a fund that invests in small cap companies from Asia with a fund that holds precious metals. By looking at funds with different objectives, you'll get a skewed view of performance vis-a-vis fees.

Scrutinize the total expenses and fees the fund charges. For example, the American Funds Growth Fund of America has a lower expense ratio (0.69 percent) than the T. Rowe Price Capital Appreciation Fund (0.74 percent), as of November 22, 2010. However, the American Funds Growth Fund of America charges a 5.75 front-end sales load, meaning the fund deducts 5.75 percent from your investment. If you invest $10,000 with the fund, it will deduct $575 from the investment as a sales charge and invest the remaining $9,425. The T. Rowe Price Capital Appreciation Fund does not charge a sales load.

Evaluate performance vis-a-vis fees. Through November 19, 2010, the American Funds Growth Fund of America produced a return of 2.28 percent over the most recent five-year period. This does not take into account the 5.75 percent sales load. The T. Rowe Price Capital Appreciation Fund returned 5.13 percent over the same period. Therefore, even before adjusting for the sales load, the T. Rowe Price fund provides a better historical return than the American Funds' example. Of course, as mutual funds are required by law to state: "Past performance is not necessarily indicative of future returns." But, as Bill Barker of The Motley Fool argues, even before adjusting for sales charges, no-load funds, on average, beat out funds that charge a load over three- and five-year time horizons.

Tips

  • As the U.S. Securities and Exchange Commission notes, federal regulations limit mutual fund load charges to 8.5 percent.
  • Some funds charge a redemption fee, which is distinct from a sales load. Funds charge redemption fees, which cannot exceed 2 percent, when you redeem shares to cover costs associated with running the fund.

About the Author