This article focuses principally on the
load fund segment of the mutual fund industry where selling abuses are most prevalent.
What is an advantage of buying a
load fund? What is a disadvantage?
I find that
load fund investors base fund-trading decisions on previous performance to a greater extent than do no-load fund investors.
Hence,
load fund investors may be more reluctant to redeem shares than no-load investors because they would abandon future benefits.
The commission charged on a front
load fund can vary up to nine percent of the amount invested, and can be redeemed at any time at no charge.
However, little attention has been given to the financial decisions that an investor must make once he or she has decided to purchase a
load fund, and typically 60% of investors still purchase load stock and bond mutual funds.[1] One reason for this omission is that for many years, nearly all
load funds imposed an up-front 8.5% commission on the purchase price, so the decision was relatively simple.
Results for expense ratios in Table 1 are noteworthy when compared to the common claim by
load fund sales representatives that no-load funds have higher expense ratios than
load funds.
They could buy shares of a
load fund through broker-dealers or other professionals, paying a "front-end" sales charge of up to 8.5%, or they could buy shares in a no-load fund offered primarily through advertisements.
(186) That high brokerage commissions, turnover ratios, and expense ratios coexist in the
load fund segment of the fund industry suggests that the fund industry's mangers operating there, whether advisory firms or distributors, have no trouble seizing on multiple opportunities to charge excessive fees to funds they supposedly serve.
The proliferation of different
load fund classes boils down to a cynical attempt to compete by engendering consumer confusion and exploiting consumer ignorance.