In the first quarter of 2015, we have seen the Obama administration be serious about cracking down on backdoor payments and hidden fees that several Wall Street firms allegedly benefit from. The firms are said to be selling investments with “high costs and low returns” rather than sharing quality investment advice. (Read: White House Warns of Backdoor Payments for Retirement Investments)

Now, the Labor Department has announced a proposal, which would require brokers to have a legal duty to prioritize clients’ interests. The protection is believed will save $40 billion in fees over 10 years. According to the Bloomberg, “Brokers could earn sales commissions and other fees that create conflicts of interest if they sign a “best-interest” contract with investors,” said Labor Secretary Thomas Perez.

The importance associated with the costs is undeniably crucial. Costs associated with owning a mutual fund, be it the fund expenses or load, eats into the profit. In fact, too high charges for a fund with muted return may result ultimately in a loss. For example a $10,000 investment in a stock mutual fund for 3 years providing just 2% return and carrying a 3% sales charge on purchases, 3% deferred sales load and 1.5% annual expense would return the investor about $9,550.

Front and Back End Sales Loads

Front End Sales Loads: These are fees that an investor must pay at the time of investment. Also categorized as “Sales Charge (Load) on Purchases”, these are charges an investor pays while purchasing a fund. The front-end sales load is deducted from the actual invested amount, and the remaining portion is actually used to buy funds. For example, a front-end sales load of 5% will deduct $500 from an investment of $10,000 and the remaining $9,500 will be used for buying funds.

Back End Sales Loads: These are fees that an investor must pay while selling the investments. Categorized as the “Deferred Sales Charge (Load)", these fees are deducted while redeeming fund shares. The advantage of back end sales load over front end sales load is that the entire capital (minus other charges) is invested at the time of purchases. The sales load here is calculated off the initial investment made and not based on ultimate fund value.

Effect of Load Charges on Fund Return

It is best to avoid high-cost mutual funds that have low return. In the first quarter of 2015, the best gains have come from a no-load fund - Turner Medical Sciences Long/Short Investor (TMSFX - MF report). In contrast, the best gains in Q1 for a fund that carries a load was at 22.5%. This was achieved by Rydex Japan 2x Strategy A (RYJSX), thanks to bullish investment scenario in Japan this year so far. (Read: Nikkei Hits 15-Yr High on Upbeat Economy). Effects of sales load is further evident from the fact that a 1-year return of 20.1% for Rydex Japan 2x Strategy A fund comes down to 15.1% when adjusted for load charges.

The chart below shows how the return goes down for 1 and 3-year period when adjusted for load charges:

 The chart reveals how load charges reduce return. In fact positive returns for funds like Templeton Emerging Markets Small Cap A (TEMMX), Principal SAM Conservative Bal A (SAIPX), Wells Fargo Advantage Intl Equity A (WFEAX) and Wells Fargo Advantage Divers Inc Blder A (EKSAX) turn into negative return when adjusted for load charges.

Keep reading our Mutual Fund Commentary section, where we are reporting on performances and best picks from fund families and varied categories.

Top 10 No-Load Mutual Fund Gainers in Q1

Below we present the top 10 No-Load mutual funds with best returns of Q1 2015:

Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. 3-M % Rank vs Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst.

Of these 10 funds, T. Rowe Price Health Sciences (PRHSX - MF report) and Janus Global Life Sciences T (JAGLX - MF report) currently carry a Zacks Mutual Fund Rank #1 (Strong Buy).

However, half of these funds currently carry unfavorable Zacks Rank. While Turner Medical Science Lng/Srt C (TMSCX), Rydex Japan 2x Strategy H (RYJHX- MF report), Fidelity Adv Biotechnology I (FBTIX - MF report) and Oberweis Small-Cap Opps (OBSOX - MF report) carry a Zacks Mutual Fund Rank #5 (Strong Sell), Fidelity Select Biotechnology (FBIOX - MF report) holds a Zacks Mutual Fund Rank #4 (Sell).

About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.