Tackling the load vs. no-load mutual fund debate

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Q You often run lists of top-performing mutual funds, and I wonder whether the load/no-load issue - which you often write about as a factor in choosing funds - is taken into account? If you subtract the "load" from many of these top-performing funds, they may actually underperform many no-load funds you don't mention.

T. M., via e-mail

A "You would never want to use a performance chart as your sole source of information in buying into a mutual fund," says Russ Kinnel, who heads up equity analysis for information firm Morningstar Inc., in Chicago.

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Performance charts are not lists of recommended funds, he says. Rather, they are snapshots of which funds are performing best at a specific period of time, usually for a trailing quarter, or year. Most newspaper business pages run such "snapshots" to show readers which funds have been out front, irrespective of their load or no-load status.

But these same best-performing funds may not be the best-performing funds in the current or upcoming time period.

Concerning load funds (where you pay a company a sales charge) versus no-load funds, "while it is true that there are some attractive and relatively low-cost load funds, such as the American Funds, or Fidelity Advisor Funds, you will probably usually come out well ahead over time with a no-load fund that also has a very low fee structure," Mr. Kinnel says.

Load funds are designed for people who need continuous help from an investment advisor. No-load funds (many of whom also offer advice, incidentally), are best for self-starters, folks who pick a fund, invest, and leave it largely alone, Kinnel says.

The load/no-load comparison can sometimes get dicey. Some companies that carry a load fund as part of a retirement plan, such as a 401(k), may actually absorb the cost of the load, thus negating the charge for all practical purposes, for its employees.

It's also true, Kinnel says, that some load funds may in fact be as low cost or even "less expensive" than no-loads with hidden charges, or lots of back-end fees, often called redemption fees.

Many no-load funds are really "low load" funds, that is, their fee structures have become so complicated an investor winds up paying a three percent or more premium just to stay in the fund. But that is still about half the cost of a typical load fund.

The bottom line, says Kinnel: Use newspaper performance charts as guides. But do your homework. Unless you need special advice, invest in a no-load from such low-expense firms such as Vanguard, Fidelity, T. Rowe Price, or TIAA-CREF. If in doubt about a fund, give it a quick call.

In some sectors, you have to be especially vigilant. One area: international investing, where load funds, for a variety of reasons, tend to be well established.

Always shop around for a no-load fund, Kinnel recommends.

Q Each week you chart the progress of the Dow along with the "22-week moving average." Why does the line measuring this average run much longer than 22 weeks? What is the significance of the moving average?

M.R., Lincoln, Mass.

A As Ralph Acampora, chief technical analyst for Prudential Securities, notes in his book "The Fourth-Mega Market," a moving average is a long-term "trending tool." When the Dow breaks above its own moving average, that's a sign investors are bullish, paying more than the average price for stocks. When the Dow breaks below its moving average, that suggests a bear market and a loss of price momentum.

Our moving-average goes back more than 22 weeks to give readers more historical data. Each point plotted, though, averages only the Dow "closes" for the past 22 Fridays.

(c) Copyright 2001. The Christian Science Monitor

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