From the January 1997 issue of Entrepreneur

Economist Milton Friedman once wrote that there is no such thing as a free lunch. Though Friedman's words are now considered a classic axiom of commerce, many of today's investors still believe they can get something for nothing--and they seek it from that bastion of capitalism, Wall Street.

In the past 10 years, the number of investors has soared, along with the level of the stock market and the number and type of mutual funds. Where once there were simple stock and bond funds, there are now dozens of funds investing in every conceivable type of security, using every kind of strategy. Some invest in certain sectors; others in different styles; still others specialize in particular countries. At last count, there were more funds than there are companies on the New York Stock Exchange.

As funds have proliferated, so have the ways to invest in them. Many investors are more, not less, confused than ever before. Let us make one thing perfectly clear: Whether a fund is no-load, carries a fee when purchased, has a fixed annual fee, or has a fee that decreases as the years pass, there is no such thing as a free mutual fund (although there may sometimes be a free lunch). All funds charge for the expertise of their managers and/or for the trading of their securities . . . and yes, Virginia, that means your no-load fund, too. That said, here are some ways to decipher the payment options available.

Read It And Reap

Anyone who has ever considered investing in a mutual fund has probably been barraged by admonitions to read the prospectus before you invest or send money. Why, you may ask, when it's so boring?

Because this much-maligned document discloses valuable information, including, but not limited to, how the fund invests, how the money will be managed, how performance is calculated, and how investors can buy and sell shares. Best of all, the prospectus tells you everything you need to know about fees and sales charges, expenses and redemption fees.

Additional information can be found in the fund's proxy statements, annual reports and other sales literature. Other information sources include Lipper Analytical Services Inc. in Summit, New Jersey, and Morningstar Inc. in Chicago. All in all, reams of information on funds are available, but investors must remember that past performance is just that and it is no indication of future returns.

Fee-For-All

Many funds charge investors a fee to invest in addition to their built-in transaction and management costs. This fee is sometimes called a "load," and the maximum allowed is 8.5 percent of the assets invested. To suit the needs of a spectrum of investors, many fund families make different classes of funds available, allowing investors to pay either when buying or selling shares. Here are some of the classes of load fund shares:

1. Class A shares: For these types of shares, a front-end sales load is charged to investors whenever new shares are purchased. Fees can be as high as 8.5 percent, though competitive pressures have forced many fund families to lower fees to the 3 percent to 6 percent range. Lower-load funds are usually sold directly to investors by a fund's sponsor. Investors purchasing large amounts often reach a "breakpoint" in sales charges, meaning as sales increase beyond a specified dollar amount, the load drops. To find the breakpoint for a fund family, read its prospectus.

2. Class B shares: These funds have a contingent deferred sales charge, sometimes called "rear end" or "back end" load. Some fund families provide this option, which allows investors to invest without upfront fees. Instead, fees are assessed when investors leave the fund, declining as time goes on (so the longer you stay in the fund, the lower the fee). Most fees start at 5 percent and decline 1 percentage point annually.

In most fund families, shares purchased through the reinvestment of dividends and capital gains are exempt from rear-end fees and may be sold at any time without a charge. Investors may also switch from one fund in a family to another with little or no fee. (However, switches made in taxable accounts may trigger taxable events, so consult your tax advisor.) Class B funds also charge an annual fee to market the fund, which is usually about 1 percent of average net assets.

3. Class C shares: In this case, a 1 percent contingent deferred sales charge is levied on shares redeemed within approximately one year of purchase. After this time period, there is no longer any fee. Because of their low fees, these funds are most suitable for clients with short-term investment goals, although bear in mind, mutual funds are long-term investments and not designed for short-term trading. These shares are also sometimes called "level load."

4. Classes Z, T, M: Different fund families have made new classes of shares available or have changed the names of their fund classes. So far, no rules have been set that require funds to use particular letters to designate fund classes. For investors, it's back to school . . . or back to the prospectus to find out what these types of funds charge.

No Load, No Advice

Just what is a load, anyway? The dictionary defines a load as "something that weights down or oppresses like a burden" or "grievous weight." Although the load may not be all that grievous, when it comes to investing, why would anyone pay anything other than the standard fees to invest in a fund?

Remember, all funds have transaction fees when stocks are traded and management fees to pay the person who handles the selection and monitoring of the portfolio. Index funds are the least expensive, as very little trading and no management are involved. But all funds, whether load or no load, charge for their service, just the way the gardener, dry cleaner or doctor does.

Though it is certainly possible to successfully invest in a selection of mutual funds and alter them as your situation and that of the financial markets change, most investors are either too busy or too inexperienced to do so. What comes with a load fund's additional price tag is not only a fee but the advice of your financial professional.

If you're buying a shirt, and you have the choice of paying the markup or not paying it, you'd probably choose not to pay it. After all, most shirts are not too expensive, can be replaced easily and don't need servicing. Investing your hard-earned money in mutual funds, however, is a substantially more expensive and important endeavor. When you buy into a fund on the advice of a professional, you're paying for his or her expertise.

Unfortunately, the value of advice varies. Before you heed any advice, be sure the advisor you choose knows and understands your needs. Such an advisor can help you select funds and monitor both your portfolio and your changing needs, making sure your investment continues to fill the bill.

The advisor's investment management method should also be clear. Does he or she believe in dollar-cost averaging or in investing all at once? Whatever the advisor's style, make sure you understand and agree with it before you invest. Ask what part the fund in question will play in your portfolio, what makes it special and why it is recommended over similar funds. If you are satisfied with the advice, isn't it worth the price of admission?

Lorayne Fiorillo is first vice president of investments at Prudential Securities. She presents retirement planning and personal finance workshops worldwide. For more information, write to her in care of Entrepreneur, 2392 Morse Ave., Irvine, CA 92614

Time In Or Timing?

Even the best financial advisor can't predict what the financial markets are going to do, and statistics on the performance of mutual funds may be deceptive. While a fund may have increased sharply in value over the past five years, that doesn't mean that every investor in the fund has earned that performance, unless they have stayed invested, reinvesting dividends or following the same road as the fund selected.

In addition, different investments do best at different times. For example, returns of stocks have historically outpaced those of bonds over the long term, but this doesn't happen every year. Knowing how the returns of different investments relate to each other is an integral element of any sound investment program, whether your portfolio relies on individual securities or mutual funds. Knowing when to invest in each type of investment is also a key to success. Generally, the markets reward investors who are patient. It is easier to invest successfully if you have long-term goals and resist the urge to move money quickly in and out of the markets. Some investors are ill-prepared for trying times when the markets are down; they must remember that most experts believe a disciplined, long-term approach works best since it is virtually impossible to time the markets' peaks and valleys, no matter how tempting that may be.