What is an A-share mutual fund?
An A-share mutual fund, also known as a front-end loaded mutual fund, incurs a sales charge at purchase. If the load is 6%, your investment of $10,000 will leave you $9,400 worth of shares at the end of the first day. Some misleading firms use the phrases “bid” and “ask” as if mutual funds trade like stock. They do not. In those quotes, the lower “bid” price is equal to the net asset value of the portfolio, just like the price of a no-load fund. The higher “ask” price adds the sales charge. When you buy shares, you must pay this higher price.
Why you should avoid loaded A-share mutual funds
Immediate loss of value
Paying a front-end load immediately reduces your wealth. For example, spending $50,000 on a fund with a 6% load leaves you with $47,000 as of the first day. Your investment must grow by about 6.4% just to get back to $50,000 – where you’d have been had you simply stuffed your money in a pillow case instead.
Permanent and increasing harm
As investments grow over time the magnitude of forfeited money grows as well. A $50,000 investment in a no-load index fund tracking the S&P 500 with a 0.2% expense ratio at the start of 1998 would have grown to $190,613 by the end of 2017. If a 6% loaded fund was purchased instead, the $47,000 of identically invested assets would have grown to $179,176. Invested in the same stocks, the $3,000 loss from sales fees grew to over $10,000.
The impact on bond fund returns is even more dramatic in percentage terms. The 6% hit to your initial purchase is the same; $50,000 instantly drops to $47,000. But when stripped from assets with lower average returns, the harm is more pronounced. Figure 25-2 shows growth of a blend of investment grade bonds. A no-load fund with these assets would have grown to $148,791 in the two decades ending 2017. A loaded but otherwise identical fund would have ended up at $139,864.
What you should do instead
If the loaded mutual fund you hold or are considering is the major component of your overall investment plan, click here for a proper investment regimen.
If instead you hold or are considering a loaded mutual fund as a specific ‘solution’, such as handling your mid-cap exposure, find a low-cost no-load fund in the same category. Morningstar and good institutional platforms have handy mutual fund screening tools. Sort by expense ratio; index funds within the category will likely be at the top of the list. If there are no low-cost index funds at your institution, you should switch institutions.
* Data sources:
Stock returns: S&P Dow Jones Indices LLC; Standard & Poor’s 500 Index.
Bond returns: Federal Reserve Release H-15; An index of equal parts (25% each) Moody’s Aaa corporate bonds, Moody’s Baa corporate bonds, 5-year Treasury bonds, and 10-year Treasury bonds, rebalanced annually.
Fund expense rate: 0.2%
Loaded A-share sales charge: 6% upon purchase.