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MintLife Blog > Investing Advice > Investing 101: Hidden Fees in No-Load Funds

Investing 101: Hidden Fees in No-Load Funds

Investing Advice

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One of the primary advantages in mutual fund investing is its simplicity compared to owning stocks — or so some investors believe.

It’s true that professional management, diversification, and the ease of reinvesting earnings, are all great advantages. But when you pick one mutual fund over another, are you sure you are getting the fund that offers the lowest fees?

All professionally managed funds charge a management fee, and that is typically about 1.5% of annual net asset value. But beyond this fee charged by all managed funds, a range of other fees — some obvious and others less so — can also be charged. The best-known of these fees is the load, which is a commission taken from funds invested to pay a salesperson.

The comparison between load and no-load funds is not as straightforward as it seems at first glance. A “load fund” charges a load, or sales commission. This is applied either up front (taken out of investment dollars) or as a back-load, assessed upon sale of shares. A back load may also be called a “redemption fee.” A no-load fund does not charge a sales commission of any kind.

Simple enough; but there is more. Some funds, including many so-called no-load funds, charge fees of different types and names. To make a truly valid comparison between different funds, you need to understand what those fees are and how expensive it is to own shares of a no-load fund.

One of the most audacious of these fees is the so-called 12b-1 fee. This is a fee charged to investors to pay for the marketing and promotion of the fund. It may range between 0.25% and 0.75% of asset value every year, and is included in the fund’s expense ratio.

That 12b-1 fee may seem like a small percentage, but over time, it adds up to a significant difference in investment outcome.

Consider this example: A 100% no-load earning 9% annual net return per year yields $295 per $1,000 after three years.

$1,000 (1.09)3 = $1,295, yield $295

With a 5% front-end load, the same investment yields only $230 per $1,000. 

$1,000 – 5% = $950.

  year 1: $950 x 1.09 = $1,035.50

  year 2: $1,035.50 x 1.09 = $1,128.95

  year 3: $1,128.95 x 1.09 = $1,230.28, yield $230.28

Take out 12b-1 fees every year in addition to the front-end loand, and your real return can be drastically reduced, even with compounding. In other words, 9% is not always 9%, because fees and the timing of their assessment change what you really earn.

Not all no-load funds charge a 12b-1 fee. Those that do not are called “true no-load” funds. 

There are still other types of fees you may encounter when researching your investments. Funds, load and no-load, may assess “custodial” or “managerial,” or “administrative” fees. So a fund advertising itself as a no-load may end up paying salespeople through assessment of a fee with a different name. If those fees are collected every year and based on your net asset value, they will add up to much more than an up-front load charged for the same commission.

With the many names given to fees, making accurate comparisons is complex. But there is help. The Financial Industry Regulatory Authority offers a free mutual fund fee analyzer that compares the overall cost structure of different funds. Check it out for yourself here — and remember, a sales load by any other name is still a sales load.

Michael C. Thomsett is author of over 60 books, including Winning with Stocks and Annual Reports 101 (both published by Amacom Books), and Getting Started in Stock Investing and Trading (John Wiley and Sons, scheduled for release in Fall, 2010). He lives in Nashville, Tennessee and writes full time.

Investing 101: Hidden Fees in No-Load Funds was provided by  

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