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Show Mutual Funds: not an easy decision to make By CURTIS G. MARSH For many years choosing among mutual funds was relatively ; simple, because there were just two broad categories of funds: loads and no-loads. Load funds carried a front-end sales charge I of up to 8.5 percent and were sold chiefly by brokers, who sifted through hundreds of funds to find those that matched the investor's inves-tor's objectives. No-loads carried no sales charge but had to be I sought out by investors themselves and purchased by mail. (All funds, however, even no-loads, charge basic administration and advisory fees, which generally run .5 percent to one percent of average assets.) Then a few years ago, the mutual fund scene became more complicated, as distinctions between load and no-load funds blurred. Many load funds began charging a maximum of four-five four-five percent, while many no-loads became what are now called "low-loads" by charging a one-three percent sales commission up front, even thoueh thev were not sold by brokers. The gap narrowed still further when some low-loads started charging 1 investors a one percent fee to redeem their shares. 1 Recently, another new category of funds emerged. They are fj often referred to as "12b-l funds" and because they are new and B something of a hybrid, they have confused some investors. But H 12b-Is are quite easy to understand. A 12b-l fund pays the distributor an annual distribution fee, which typically runs between .5 percent and 1 .25 percent average aver-age assets. Such a fee is permitted by Securities and Exchange Commission Rule 12b-l (hence, the fund's name) and is in addition to the basic administration and management fees mentioned men-tioned earlier. The practical effect of the distribution fee is that shareholders pay for fund distribution in increments over a period of years. Many 12b-l funds do not have front-end load sales charges. The advantage to the investor is that when you put $ 1 ,000 into a "12b-l" fund, the full $1,000 is invested, unlike a front-end load fund in which the commission is deducted first, leaving less working for you. However, these back-end load funds charge a "declining deferred sales charge" if you sell your shares within a certain number of years. For example, you may pay a charge of five percent if you sell in the first year. The charge is reduced to four percent in the second year and so on down to zero in the sixth and subsequent years. The exit charge does not apply to market appreciation, reinvested dividends and distributions or exchange among the portfolios. These redemption fees are often waived for withdrawals from IRAs and Keoghs. It's difficult to make direct comparisons of total charges between 12b-ls, load funds and low-loads. Aside from the different diffe-rent front-end, back-end and distribution fees charged by various va-rious funds, much depends on how long you hold a fund and how ! much you invest. That's because many load funds scale down their commissions as the amount invested increases. Although it's important to understand the cost of investing in any mutual fund, it's equally important to remember why you're investing to increase your capital or your income or both. How well a fund performs and how well it matches your investment invest-ment objectives is the main criteria on which you should base your investment decision. But with over 1,800 mutual funds available today, few individuals indi-viduals can adequately research fund performance and select funds. This is the key reason why it's smart to buy mutual funds through a brokerage firm, rather than on your own. An experi- i enced financial consultant can help you find funds that perform well in both up and down markets and fit your investment objectives. |
