Know your investment

What are the costs?

Every fund has costs, but they can vary widely from fund to fund. There are three main costs to consider:

1. Sales charges     

Sales charges are the commissions you pay when you buy or sell a fund's security. If you pay this fee when you buy the fund, it's called an initial sales charge or front-end load fee. Fees paid at the time of purchase generally range between 0-4%.

If you pay a fee when you sell, it's called a deferred sales charge or back-end load fee. The fee is generally in the range of 0-6% depending on how long you have held the securities.  The longer you hold the security the lower the deferred sales charge. Some funds sell their securities on a "no-load" basis, which means you pay no sales charge when you buy or sell.

a) Comparing sales charge options

With initial sales charges, the cost can vary from firm to firm and may be negotiable. Shop around, and remember that every dollar you pay in commission is a dollar that does not work for you.

With deferred sales charges, the fee is set. There is no negotiation. You may be able to switch within a family of funds without having to pay this fee.

2. Management expense ratio (MER)

Each mutual fund pays an annual fee to a manager for managing and administering the fund. A management fee is a service fee you pay the manager of the fund to manage the risk inherent in the fund's portfolio. The higher the MER the more you will pay for management and administration. Some funds charge additional administrative fees not included in this figure. You should ask your advisor if this is the case with your investment product and if so what would be the revised MER.

A mutual fund pays its own operating expenses. These include legal and accounting fees, custodial fees, bookkeeping costs and other expenses. Some mutual funds pay a fixed administration fee to cover their operating expenses.

The management expense ratio (MER) is the total of the management fee and operating expenses expressed as a percentage of the fund's value. Fund's show their MER as a percentage of the fund's assets. For example, if a $100 million fund has $2 million in expenses for the year, its MER is 2%.

a) Trailer fee

The fund manager pays this fee to the salesperson or firm who sold you the security. The salesperson receives this fee for as long as you own the fund security. This means the salesperson should be providing you with ongoing services such as answering questions you may have about the performance of your fund(s), and other related matters. The fee generally ranges between 0.25 and 1% and the manager pays it out of the management fee.

b) Comparing MERs

A fund pays a fee to a professional manager to manage risk.  The MER can range from less than 1% for money market funds to more than 3% for some specialty funds such as global technology or emerging growth funds. Riskier complex funds tend to have a higher MER because the manager constantly monitors the various risks and adjusts the fund's portfolio accordingly. Index funds usually have low MERs because there is little active portfolio management.

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3. Other fees

You should enquire about other fees the fund may charge such as a fee to switch funds, start a registered plan, or open or close an account.

You may pay a short-term trading fee if you sell a fund within a certain period. Short-term trading fees discourage investors from using mutual funds to make a quick profit by "timing" the market. Short-term trading can affect the other investors because it increases the fund's brokerage and administrative costs and can decrease the value of the fund.

How fees affect your return

The MER reduce how much you will make. For example, say a fund has made a return of 10% in a year. How do the fees affect your return?

XYZ Canadian Balanced Fund 
    Fund's return

10.0%
    Less MER

- 3.0%
    Your return

7.0%

 

 

   

This means the fund used 3.0% of your return to pay fees and expenses, leaving you with a return of 7.0%.  Any sales charges you pay will also reduce your return.

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