Let's first review the mutual fund structures. Load funds charge a commission
while no-load funds are commission-free. The structure of load funds can be (1)
front-end with the commission varying from 3 to 6.25 percent of the investment,
or (2) back-end, also known as redemption, with the commission usually at 3 to
5 percent of asset value when sold. In addition, pratically all load funds
charge annual distribution fees, also referred to as 12b-1 fees, which are used
to pay for promotional costs. These costs vary from 0.25 to 0.95 percent 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 percent no-load or true
no-load.
Is there really that much of a worthwhile difference between load and no-load
funds? In the mutual fund illustrations below, assume all funds have equal
ability in order to accurately demonstrate the differences in performance.
Assuming a $10,000 investment with a conservative nine percent annual net
return rate (after annual fund operating expenses) over three years, the
following illustrations compare the differences in total return and Return on
Investment (ROI) among three different types of mutual fund structures:
100% no-load (no 12b-1 fees)
5% front-end load with 0.5% per year 12b-1 fees
3% back-end load with 0.5% per year 12b-1 fees (redemption in year 3)