Costs Associated with Owning Mutual Funds
As a mutual fund investor, you hire a group of people to manage your money, account for it, and keep you informed. You pay their salaries and the expenses associated with managing the fund through various fees. Some of those fees are paid directly. Others are paid indirectly through periodic deductions from the mutual fund. You’ll find all fees – direct and indirect – detailed at the front of the fund’s Simplified Prospectus.
In most cases, every mutual fund pays management expenses. These costs are deducted from the fund. The fund reports the management fee and direct costs it pays each year as a “management expense ratio (MER).” This MER relates those costs to the fund’s value. If a $100 million fund has $2 million in costs, its MER is two per cent. The costs are deducted before the fund’s performance returns are calculated. If your fund made a gross return of 12 per cent and the MER was two per cent, the reported return for the year would be 10 per cent. The “management fee” covers a variety of costs such as the mutual fund’s investment management, marketing and administrative costs. Each fund also pays its own operating costs such as brokerage fees on securities trading, audit fees and unitholder communications.
Sales fees compensate advisors and dealers who sell funds on behalf of mutual fund companies. There are two types: sales commissions and trailer fees.
Sales commissions are paid at the time of sale, or shortly after, to the advisor or dealer who takes your order. There are two formats:
You pay this directly. For example, the advisor might charge four per cent, which would be deducted from your money and the remainder would be invested. Fees for front load funds may be negotiable.
- Deferred sales charge (DSC) or Back-end load (including Low Load)
The mutual fund company pays the advisor a commission on your behalf, often about five per cent. All of your money is invested, but you face a redemption fee if you sell your units within a set period of time. That fee, which usually declines to 0 per cent over six years or less, provides reimbursement for the commission that was previously paid on your behalf.
Often, you can switch among funds in the same family without facing a redemption fee. You can often redeem up to 10 per cent a year without paying a redemption fee.
Trailer fees pay advisors and dealers a deferred commission for the sale of mutual funds to investors. Each year the advisor or dealer gets an amount that equals a certain percentage of your account’s value. You do not pay trailer fees directly – the mutual fund company pays them to an advisor on your behalf.