buying a front end load mutual fund
Our club wants to buy into the Invesco Equity and Income mutual fund. The initial investment is $1000 and there is a front end fee of 5% which works out to be $50. The price of the unit is $10.47. Can any one tell me why it is not advisable to purchase front end load mutual funds and are there any tax or other problems we may encounter in the future. We are still a new club and most of the members are wanting to do super safe investments. HELP!
Joy,
The front-end charge is treated as a purchase commission for tax purposes. Either you will be investing $1000 and paying an additional $50, or you will pay $1000 but only invest ~$952. There aren't any generic tax problems with front-load mutual funds, but there may be a problem with a specific fund based on what it invests in. If you have questions about a specific fund, it's best to send a request to support@bivio.com and someone will look at it and advise you of any potential accounting problems.
Ira Smilovitz
On Thu, Mar 5, 2015 at 9:54 PM, Joy Russell <jmariap50@gmail.com> wrote:
Our club wants to buy into the Invesco Equity and Income mutual fund. The initial investment is $1000 and there is a front end fee of 5% which works out to be $50. The price of the unit is $10.47. Can any one tell me why it is not advisable to purchase front end load mutual funds and are there any tax or other problems we may encounter in the future. We are still a new club and most of the members are wanting to do super safe investments. HELP!
Aside from paying 5% of your funds just to get into the game and probably a transaction fee to your broker, you need to earn 5+% the first year to get back to a position of no gain. My club puts its cash in a no-fee index fund at TDAmeritrade, earns way more than money market rates, and we are investing 100 cent dollars.
Mike Jones
Wall$treet Wannabees
Bloomington, MN
From: Joy Russell <jmariap50@gmail.com>
To: club_cafe@bivio.com
Sent: Thursday, March 5, 2015 8:54 PM
Subject: [club_cafe] buying a front end load mutual fund
Our club wants to buy into the Invesco Equity and Income mutual fund. The initial investment is $1000 and there is a front end fee of 5% which works out to be $50. The price of the unit is $10.47. Can any one tell me why it is not advisable to purchase front end load mutual funds and are there any tax or other problems we may encounter in the future. We are still a new club and most of the members are wanting to do super safe investments. HELP!
Joy,
Mike is right. In addition to the front end fees and maybe sales fees (when the fund is sold) it is just as important to understand the annual cost of running the mutual fund. This is referred to as the Expense Ratio and is shown as a percent for what is charged each year. So a .5% expense ratio means that the fund will charge you $5 for each $1,000 each year. Now that might sound like much but if you look at this table which is from a presentation by Jack Bogle (founder of Vanguard) you can see small fees like even a .5% can turn into big differences in how much you have after 20 or 40 years. The table is for $10,000 invested at the beginning and assuming an annualized return of 10% in each case but with different annual expense fees (Expense ratio). You can see that a fund that has a 1.5% annual feee drops your value after 20 years by almost 25% and for 40 years over 40%!!!!
By the way, the average of all mutual funds is an expense ratio around 1.5%! This is equivalent to a huge leak in our boat. I encourage people to look for low expense ratio ETF funds that are tied to a Broad Market Index. As an example SPY which is based on the S&P 500 Index has an expense ratio of about .1% and Vanguard's VOO, also based on the S&P 500 index, has an even lower expense ratio.
Morningstar is a great place to look up mutual funds and explore both their performance and there is a tab for "Fees & Expenses" where you can check on all publicly traded mutual funds and ETFs. There is a free side to Morningstar that is quite good and then there is a paid side as well that has even more information. Some libraries will give you access to the online paid side just by having a library card. www.morningstar.com
If you have mutual funds at work through your retirement account sometimes those are publicly traded and can be looked up on Morningstar. But other times those are Institutional funds and you cannot look them up on Morningstar. In that case I would contact your HR department to get information on the funds including what their annual Expense Ratio is.
Hope this adds to the discussion,
Paul
On Fri, Mar 6, 2015 at 10:27 AM, Mike Jones via bivio.com <user*21595500001@bivio.com> wrote:
Aside from paying 5% of your funds just to get into the game and probably a transaction fee to your broker, you need to earn 5+% the first year to get back to a position of no gain. My club puts its cash in a no-fee index fund at TDAmeritrade, earns way more than money market rates, and we are investing 100 cent dollars.Mike JonesWall$treet WannabeesBloomington, MN
From: Joy Russell <jmariap50@gmail.com>
To: club_cafe@bivio.com
Sent: Thursday, March 5, 2015 8:54 PM
Subject: [club_cafe] buying a front end load mutual fund
Our club wants to buy into the Invesco Equity and Income mutual fund. The initial investment is $1000 and there is a front end fee of 5% which works out to be $50. The price of the unit is $10.47. Can any one tell me why it is not advisable to purchase front end load mutual funds and are there any tax or other problems we may encounter in the future. We are still a new club and most of the members are wanting to do super safe investments. HELP!
I guess my other thought is why a mutual fund at all. Whether you are technical investors, or fundamental investors (BI being one method), have a purchase process for the club.
AND since your fellow members appear to be "conservative" as you state, (I would postulate risk averse/perhaps nervous about stock selection), perhaps the idea is to educate one another on a method, and a definition of risk the club will use for stock purchases, and then, use the method to buy stocks.
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Also, think about this. Most mutual funds do not beat the market. Only a few have consistently done it for multiple years in a row. So, the bar is really low for you to do better. If your club is "conservative" then give this a try. I read about a seamstress who lived below her means and invested a little of each paycheck. Didn't sell just bought. Never married nor had any children. When she passed away she left a huge amount
of money to a college. It turns out that her criteria in picking stocks is whether she used the product and liked it. That's it. Conservative investing to me is investing in companies that you know are going to be around for a long time and are growing. Like Disney.
John Rice
On Friday, March 6, 2015 9:26 AM, Irina Clements <irina39@verizon.net> wrote:
I guess my other thought is why a mutual fund at all. Whether you are technical investors, or fundamental investors (BI being one method), have a purchase process for the club.
AND since your fellow members appear to be "conservative" as you state, (I would postulate risk averse/perhaps nervous about stock selection), perhaps the idea is to educate one another on a method, and a definition of risk the club will use for stock purchases, and then, use the method to buy stocks.
Why would you want to pay a load for a so-so fund?
Two funds with the same beta, better 5 year TR records and are no-load are VBAIX or, one of my favorites, PRWCX. There are of course other no-load moderate allocation funds better than the Invesco fund you mentioned.
Bob
On Mar 6, 2015, at 12:26 PM, Irina Clements <irina39@verizon.net> wrote:I guess my other thought is why a mutual fund at all. Whether you are technical investors, or fundamental investors (BI being one method), have a purchase process for the club.AND since your fellow members appear to be "conservative" as you state, (I would postulate risk averse/perhaps nervous about stock selection), perhaps the idea is to educate one another on a method, and a definition of risk the club will use for stock purchases, and then, use the method to buy stocks.It is not a crime for a new club not to buy right away.