Stiff fund marketing has buried many a new fee in fine print

A mutual fund investor used to have just two choices when it came to fees: load funds, which carry a sales charge of up to 8 percent, and no-load funds, which levy only a nominal fee. If only it were that simple today. Increased competition has led to higher marketing costs, and that has forced funds to heap on the fees, many of which are buried deep inside a fund's prospectus. Get out the magnifying glass and read the fine print before you become a shareholder.

``The field of fund fees is a lot more muddy,'' says Sheldon Jacobs, editor of The No-Load Fund Investor, a newsletter in Hastings-on-Hudson, N.Y. ``Now we have a spectrum of charges.''

To begin to get a handle on so many fees, first see if a fund charges a load. Loads are essentially brokers' commissions: The broker earns a portion of the load to peddle the fund to clients. The load is a one-time fee deducted from your initial investment. That means you have less money working for you from the start. Say you invest $1,000. Only $915 will be used to purchase shares if the load is 8 percent. A few funds continue to deduct loads from dividends.

No-loads rely on advertising, the financial press, and word-of-mouth for marketing so they don't charge a commission.

To win your dollar and earn their commission, load funds should outperform their cheaper colleagues. Some do. To find them, study performance rankings that figure in charges. ``Clearly, the investor should look at past performance figures in the prospectus for the last five to 10 years,'' says Barbara Levin, director of public information for the Investment Company Institute, a national association for the mutual fund industry in Washington. Rankings of fund performances are available in several popular financial magazines, including Barron's, Forbes, and Money.

``If you are prepared to do the research yourself and have the confidence in your judgment, going into a no-load fund saves you that front-load charge,'' says Reg Green, editor of The Mutual Fund News Service, an industry newsletter in San Francisco. ``If you need professional management, a sales charge is worth paying. If you get into the right fund, that 8 percent charge disappears.''

Mr. Green cites the Weingarten Equity Fund as an example. Weingarten, which recently added a load, earned its shareholders a 795 percent return in the last 10 years. ``The purist would say what a terrible thing to happen. But a lot of people who would have benefit from the 795 percent didn't because they didn't care about it,'' Green says.

Of course, some funds charge high loads and then deliver returns that are anything but stellar. ``If you can find two identical funds, go with the no-load,'' says Green.

Many load funds have lowered their up-front charges from 8 percent to 4 percent or 4 percent to compete but have added other, inconspicuous fees to make up the difference. ``There's a feeling that if you reduce prices there might be an increase in total volume,'' says Green. That certainly was the case with Pioneer Bond Fund, which dropped its load from 8 percent to 4 percent. Sales tripled in six months. ``Eight-and-a-half percent was sacrosanct,'' says Green. ``Load funds and no-load funds are both moving toward the middle.''

Indeed, some no-load funds are now being called so-called low-loads and are changing to fees of 0.5 percent to 3 percent. ``There is a lot of discussion as to what a no-load fund is anymore,'' says Mr. Jacobs.

Whether the fund you pick is a load, low-load, no-load, or something altogether different, you're apt to run into a couple of other fees.

For starters, you'll probably have to pay about 1 percent in management fees and an expense ratio, both of which go directly to the fund.

You may also have to shell out for a 12b-1 charge, an addition to the fee family. Named after the article and section of Securities and Exchange Commission code that allows it, 12b-1 fees take anywhere from 0.25 percent to more than 1 percent to pay brokers and advertising costs.

Some funds are not using 12b-1 but have written the charges into their fee structures in case they need them at a future date. Other funds are already using it. Jacobs advises investors to accept a 12b-1 of no more than 0.25 percent. ``A quarter of 1 percent is acceptable if the fund is desirable on all other scores.'' Check the prospectus to make sure you don't get socked with an extremely high 12b-1 charge.

You should also be aware of any penalties the fund might charge should you withdraw your money. To prevent excessive switching between funds, some companies charge pro-rated back-end loads of 4 to 6 percent. Each year, the severity of the fee diminishes. A few funds charge a flat exit fee of about 1 percent. ``This is a way to ensure the fund will get the money to compensate the sales force,'' says Jacobs. ``They're able to collect fees annually or immediately if he [the shareholder] redeems early.'' After five to six years, most funds will let you redeem your shares without penalty.