Mutual Fund Costs, Part 2: The Dreaded Load - YouTube

[Andy Millard] Talk about paying for the privilege. Get a load of this.

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In Part 1 of our series on mutual fund costs, we talked about the expense ratio, which tells you how much of your mutual fund investment

is kept by the fund company. But funds that are sold by brokers may carry an additional

cost. It's called a sales charge, commonly referred to as a LOAD. It's actually a commission

-- it's how the broker gets paid.  Now you should know that there are load funds

and there are no-load funds. A lot of people own load funds and aren't even aware, of it

because brokers aren't required to disclose the load to the client. So let's get you informed.

Let's look at a real-life mutual fund. The name of the fund isn't important, just know

that this is a real example and it's fairly typical. Now keep in mind, each of the four

versions we're about to look at is the exact same fund -- all are managed by the same guy,

all hold the exact same investments, in the exact same proportions. The only difference

is in the CLASS of shares: class A, class B, class C, or class....

I. Threw you off there, didn't I?

With A shares, you pay a FRONT-end load of 5.75%. That means if you invest $10,000,

575 bucks comes right off the top and goes to the brokerage firm. The expense

ratio is an additional 1.11% PER YEAR, and some of that goes to the brokerage firm too.

Total first-year cost of a hypothetical ten thousand dollar investment: $686.

If your investment neither grows nor shrinks over the next five years --

remember, this is all hypothetical --

your cost over five years would come to $1,130. B shares carry a BACK-end load. Nothing comes

off the top, but if you cash out in the first five years you get hit with an early withdrawal penalty.

The fund company still pays the brokerage firm their commission, so in order to pay

itself back for the commission, the company jacks up the expense ratio to 1.95% for the

first five years. Total 5-year cost: 975 bucks; then $111 per year after that.

C shares have what's known as a LEVEL load. They take out 1% every year for as long as

you own the fund, which explains why the expense ratio is so high at 1.89%. The total five-year

cost is actually lower than with A or B shares, but the expense ratio stays high forever,

so over the long term, C shares are the most expensive option.

The institutional share class, the "I" shares, are much less expensive. There are no loads

of any kind, and the expense ratio is only 0.65% per year. but there is a catch:

there's a minimum initial investment of 5 million bucks, so if you don't have that, you're out of luck.

Now just for comparison purposes, here's another

real-life mutual fund, but this one's a NO-LOAD fund. No front, back, or level loads of any kind,

and the expense ratio is just three-tenths of one percent. The minimum initial investment is $3,000.

So why would you ever invest in a load fund,

when there are plenty of NO-load funds to choose from? Well, if you don't have much

to invest, and you want help from a broker, a load fund might make sense. A firm like

mine is more likely to use NO-load funds, which is good -- but it's also likely to have

a minimum investment requirement. So if you don't meet the minimum, buying a load fund

through a broker might be appropriate. Just make sure you know what you're getting in to.

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Well, that's it for now. If you or someone you know needs financial planning or investment

advice, please drop me an email or give us a call here at Millard & Company. Thanks for watching,

have a great day, and we'll see you next time.