low-load fund

Should a low-load or no-load fund outperform a fund with a higher sales charge? If so, why doesn't everyone choose a fund with a low sales charge?

While it is wise to minimize fees and trading costs, it is best to start your search for the right investment without any blinders on. Develop a list of suitable choices and then compare performance net of fees and charges. All mutual funds charge some sort of recurring fee. Mutual funds are investment companies, and the fees they charge provide the revenue to run the company. Some mutual funds—such as no-load and level-load funds—internalize the fees they charge, while others—such as front-end load funds—externalize some of the fees by imposing a sales charge on the investor in addition to the internal management fees. If two mutual funds were exactly alike (two different share classes of the same fund strategy for example), and their performance and internal fees were exactly the same, then the one with the lower load would outperform the other. However, unless you are comparing two almost identical funds, I would not let the load be the sole deciding factor—the cheapest option is not necessarily the best value. With over 8,200 U.S.-based mutual funds to choose from, it is best to first identify quality managers that employ a sound investment process and then look for the least expensive way to participate.

Noah L. Myers, CFP^®, Principal and Chief Investment Officer, MiddleCove Capital, Centerbrook, CT