The differences in annual expenses can be minimal, though. Many load funds have 12b-1 fees on par with the expense ratios in a no-load fund. The big question, though, is performance. It seems logical that a fund that charges a sales fee to invest would have a stronger management team and boast better returns, whereas a no-load fund might lag behind. The truth actually is the opposite.
How They Stack Up
A study done in 2003 for the Financial Planning Journal revealed that during the time period between 2000 and 2002, no-load mutual funds outperformed load fund by a range of of 10 to 430 basis points – a considerable margin, especially considering investors were paying extra to be in mutual funds that charge a load fee.
The reason behind the consistent outperformance makes sense when you look at the numbers. Simply put, if two funds performed the same but one charged more than the other, investors who held the cheaper one ended up reaping the larger gain.
“B” shares are almost all phased out now, but some investors may still hold some of these mutual fund share types. They behave in the exact opposite manner of “A” shares in that “B” shares charge a “back end” fee when withdrawing money from the mutual fund.
The most common share class is the “C” share. This class has no up-front or back-end sales charge, but does have the highest expense ratio, often topping 1.5% annually. For long-term investors, that fee can eat away at returns, making it an inefficient share class compared to its peers.
Finally, there’s no-load funds, which don’t differentiate between share classes. All investors buy the same type of share in the mutual fund with no sales charge – although it will charge an expense ratio. In practice, most no-load funds carry relatively low expense ratios compared to their load peers, making the return difference over a long period of time even more considerable.
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