In my opinion, mutual fund sales charges are one of the biggest ripoffs in the investing world. Why should you pay upwards of 5% to buy something that you can essentially get for free from a no-load mutual fund family? You’re putting yourself in a relatively deep hole from the start, and your early returns will be eaten up just trying to get back to even money. So…
Imagine my surprise when I ran across a list of the twenty largest stock mutual funds in the most recent issue of Kiplinger’s and learned that twelve of them have sales charges ranging from 4.25% to 5.75% (avg = 5.625%). In truth, those numbers aren’t quite as bad as they seem, as ten of these funds, all of which have a 5.75% sales load, come from American Funds.
This begs the question… How is it that such expensive funds have managed to get so big? While I don’t know the answer, I’d be willing to bet that they’ve gotten their foot in the door on a substantial number of 401(k) plans, and people are buying them either because they don’t know any better, or because they don’t have a choice. Commissioned-based brokers/planners are another likely culprit — the higher the fees, the larger the commissions (thanks for pointing that out, Russ!).
A bit of investing advice
When investing, do everything within your power to minimize expenses. Stick to fee-based advisors, use no-load mutual funds, pay attention to the expense ratios, watch out for 12b-1 fees, and also be cognizant of taxes. These things can (and do!) add up over time, and will eat away at your returns.