Are high-fee funds worth it?

Send us your investing questions to: answer_guy@moneymail.com

More from Money Magazine

5 ways to pump up your income Best gifts for the outdoorsy type Best gifts for the foodie

Best Places to Live Current Issue Subscribe to Money

(Money Magazine) -- Question: I have invested in no-load mutual funds for 20 years, but I'm looking at a fund with a 4.5% load. If I plan to hold it for a very long time, investing periodically, does it make sense to pay the load? --Tom Kushner, New Canaan, Conn.

Answer: Practically, mathematically and historically speaking, no, it doesn't make sense for you to buy into a load fund. It's not an awful choice, but you could do better.

On the practical front, remember why funds charge sales loads: to compensate your broker for the wise advice he or she has given by steering you to the fund. But you seem well versed in fund investing and picked this one out yourself; why pay for services not rendered?

Now the math: By paying the load, you're immediately putting yourself $4.50 in the hole for every $100 you spend. That's $4.50 extra you have to make to match a similar no-load fund's performance. It's as if you gave someone a 4½-minute head start in a footrace: Yes, the longer you run, the better your chance of catching up, but why make it hard on yourself?

And history teaches us you're not paying more for quality. "There's no evidence that the performance of load funds vs. no-load funds will make up for the commission you pay on the former," says Mercer Bullard, a securities law professor at Ole Miss.

The only reason for you to buy a load fund would be if you can't find an equivalent no-load fund. If you're stuck on a particular manager, go ahead. But with 2,000-plus no-load funds out there, there are plenty of fish in the no-load sea.

Question: My broker suggests I move money into closed-end funds, particularly the new Eaton Vance Risk-Managed Diversified Equity Income fund. I need retirement income. But how safe would this be? --Everett Baldwin, Rocky Comfort, Mo.

Answer: Judge this fund as you would a new car model. It runs well out of the factory, but you can't assess its endurance yet.

The Eaton Vance (ETJ) offering is a seven-month-old closed-end fund (it has a finite number of shares and trades like a stock) with an eye-popping yield of 10%. It finances that lofty payout in part by holding dividend-paying stocks and selling options known as covered calls, which give the buyer the right to purchase stocks the seller owns for a certain amount at a future date. The seller generates income through the option premium but gives up gains above the option's strike price.

Manager Walter Row says the fund also employs other option strategies that help make its yield sustainable and tamp down risk to principal. Good idea. Option-income funds suffered big losses in the 1980s.

From launch through mid-January, the total return on the Eaton Vance fund's net asset value was 6.5%, compared with an 8.1% loss for the S&P 500. (ETJ, like most closed-end funds, has traded for less than NAV, so early buyers have seen losses.) So far, so good. But you want to see a lot more road testing - in up markets and down - before buying in.

Worried about your investments? Get a makeover from Money Magazine. E-mail us at makeover@moneymail.com.