Load vs. No-Load Mutual Funds

November 9, 2006

Have you ever looked at a comparison between a load mutual fund and a no-load mutual fund? I just put together an Excel spreadsheet with side-by-side comparison and the results are pretty significant. Take a look at the table, assuming the following:

5% Load on the Front-Load Fund
10% Gross Annual Rate of Return
1.25% Management Fees For Both Funds
0.25% 12b-1 Fee on the Load Fund (this goes to the firm and the broker each year)

Load Mutual Fund vs. No-Load Mutual Fund

There’s the numbers. Take them for what they’re worth. Keep in mind that some research has shown that mutual fund investors do better with an advisor (even after the loads) than they do on their own. Although this may be true, it can be overcome by practicing a little self-discipline and learning to stay the course rather than moving money in and out of different “hot” mutual funds.

Finally, keep in mind that you can find no-load mutual funds that are a lot cheaper than the ones I used in the example. I just used an average expense ratio for actively-managed mutual funds. If you go the index fund route, you can easily pay less than .25% per year in managment fees.

When it comes to mutual funds, you get what you don’t pay for!

11 responses to Load vs. No-Load Mutual Funds

  1. That’s very true, and it is obvious that when all things considered are the same, no up front load and lower expenses will add up to a significant difference over time. But, what about a real world example, comparing two funds with the same investment objective, tracking past historical results?

    For example, just quickly I went and looked at a few income funds I have heard of and know perform fairly well. Both are conservative allocations, both have a somewhat similar investment mix, both are 5-star morningstar rated and have ranked in the top 10 of income funds for the past 1, 3, 5 and 10 year periods.

    I’m looking at:

    Vanguard Wellesley Income VWINX
    Franklin Income FKINX

    No-load obviously on vanguard, and a 0.25 expense ratio. Franklin has a front-load of 4.25% and 0.65 expense ratio. Looking at the past 10 years:

    1-Year 17.35
    3-Year Annualized 11.99
    5-Year Annualized 11.64
    10-Yr Annualized 9.52

    1-Year 11.10
    3-Year Annualized 8.45
    5-Year Annualized 6.72
    10-Yr Annualized 8.66

    Now, these are total returns, not counting the loads/expenses, but in comparing two of the top funds with the same investment objective, in this case would the load and higher expense ratio be more beneficial in the long run?

    I don’t know, I’m at work and don’t have the time to calculate anything, but could you plug these numbers into your spreadsheet and see how they compare JLP? I’m curious to see how it works out when comparing them with say a 5 and 10 year annualized return for these specific funds.

  2. Always go no load!

  3. My view is that no load mutual funds are the logical choice for investors who have some investment experience and the time to do the mutual fund research necessary to make a thoughtful investment decision. No load mutual funds generally have lower expenses and overall costs compared to load mutual funds. As a result, on average and on a load-adjusted basis, no load funds should outperform load funds. I also believe that no load mutual funds have better investment management teams compared to load mutual funds. I recognize that the quality of management issue is very subjective.

    Michael Weiss
    The Editor
    The Mutual Fund Investor

  4. Jeremy in the first post proves spread sheets like this are useless and mislead people about the load no-load comparison. I hate to burst somebody’s buble, but buying a no-load fund does not guarantee you will have a higher return. It also doesn’t make sense to pay a fee for no reason. If you’re going to do your own fund picking, don’t pay a load. It does not mean you will do better than using an advisor just because you are not paying a fee or load.

  5. Jeremy, you really need to compare nearly indentical funds. Franklin Income & Wellesley Income are NOT nearly identical-look at allocation of stocks/bonds and quality and term of bonds between the two funds. Although you may find a load fun to outperform a no-load fun, always keep one thing in mind. The published return is not the return you recieve. You send in 10K to a 4.25% load fund. you recieve 9575 invested. The return of 17.35% is really 12.36%, the equivalent return had you invested 10K in a no load fund. Yes, still outperformed Wellesley, but not an apples to apples comparison. After a poor 1.9% return in 2005, would you have stayed in for a 19.1% return in 2006? Are you OK with this type of volatility for a moderate allocation? Hindsight is wonderful, are you or would you pick this fund today, or stay with it for the looong term?
    Lynn,the odds of outperforming a load fund are in the favor of a no-load investor 4:1 in any given year, higher over the longer term. I suspect your advisor is probably changing your portfolio allocation every few years moving from one load to another to keep up with market movements. Good Luck! The second richest man in the US said, “if you aren’t willing to own it for 10 years, don’t even think about owning it for 10 minutes”-Warren Buffett.

  6. Roger,

    You are correct in the that no-laod funds will outperform in any given (year) because the load is charged upfront. It is not true that it is higher over time. If you have to imagine that the broker is churning the account every few years to prove your point it is incorrect.

  7. One very important thing to keep in mind about the “comparison” above is that the management fees were kept the same and the load was a little higher than a mutual fund would charge for 100K. On 100K, the bigger mutual fund companies would more likely charge 3.5% not 5% on a front end load. Another thing to consider is no load funds don’t guarantee and equal or cheaper internal expense. Take American Funds for example, many portfolios average under 1%. When comparing the two, it is always best to use the FINRA/NASD calculator and input your actual front end load and internal costs. It will clearly show you which one is more expensive — in good ole’ black & white. I think some people would be shocked to learn that many loaded funds with reasonable internal charges beat no load funds hands down!

  8. On a front load mutual fund you are not paying 5%. Depending on the $ you are given a discount. On a mutual fund at $100k the rate would be about 3.5%, not 5%.

  9. There is no correlation between front-loaded funds and their performance versus that of their benchmark even over very long periods of time.

    There is substantial evidence that only 1 in 10 active managers actually beat their benmarks over the long term (the same number as would be statistically anticipated when assuming randomness of returns. coincidence?)

    Further, there is substantial evidence that periodically rebalancing to target adds an additional 50Bps annualized return over the long term. Front loaded funds inhibit your ability to capture this potential reblancing return premium.

    Front-loaded funds also inhibit your ability to benefit from the free lunch of tax-loss harvesting. The tax savings can be substantial, but front loads tend to cut these savings at least in half.

    I suggest you read William Bernstein. His book Four Pillars of Investing is a good warm-up. This book (among his others) provide references and data supporting my above statements.

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