Mutual funds are amid the most vastly utilized investment options, due largely to their basic method to diversification. Instead of safekeeping individual shares in a cluster of diverse companies, mutual funds allow those who invest to yield advantage of diversified stock and other securities properties and proficient money supervision through the purchase of a single mutual fund share.
There are mutual funds for almost every possible goal and financial outlook, permitting investors to tailor their investment portfolios accordingly. These funds can vary from money market, income, balanced, equities, index and portfolio solutions. Just as there are costs related with trading individual securities on the market, there are costs associated with handling a mutual fund. This is where mutual fund fees come in. It is important to understand how the basic mutual fund fees and expenses work to make the best decisions when investing in mutual funds.
There are various fee structures for mutual funds. First, there are front load funds meaning that you pay an assured percentage of your purchase as a directive upfront. Next, there are back load funds, which mean you pay a directive as a percentage when you sell all or part of your holdings in the fund. Finally, there are no load funds meaning you pay no commission.
It’s not common for a load to be as high as 5.75%. For example, for front load funds, an investment of $10,000 would result in a loss $575. Back load funds are no less painful. Either you see the fees deducted from your investment or otherwise paid to you. These fees have an impact on the return you make. The progressive the fees, the less of your investment earnings you get to keep.
While at first, a loaded mutual fund may be striking in terms of its past investment performance, investment philosophy, or reputation, it is imperative to know what the fees are before investing. There are excellent mutual funds with no load. Before buying a mutual fund you should always explore the funds management expense ratio which is also referred to as the MER. This ratio is the amount deducted from the earnings each year to cover operating expenses. This fee is calculated daily before the net asset value per share is posted and is calculated on the value of the whole fund. Some funds have practical fees, not exceeding 1%. Others can be 3% or more. These fees come right out your earnings so the lower the fee, the higher your real rate of return. The average MER is between 1.3% to 1.5%. But as with any average, of course there are funds whose expense ratio is less and others that are much higher.
Before choosing to invest, it is important to relate to fees carefully. Some funds do an excellent job of keeping fees low so that a larger proportion of the fund’s income is returned to the investors, not paid to the managers. These are the types of funds you want to invest in if you are focused on keeping costs at minimum as possible. To put a funds fees in perspective, compare them with another. Take the time to review each fee you’ll pay for the fund to understand the total cost and how it can compound over time if you remain in a fund for an extended period. You can research the fees and loads of any mutual funds online on sites such as morning star, fund library and y-charts. The time you invest in research and comparing fees, the more you can maximize revenue.
Sanchayan Sivanathan is a Centralized Advice and Service Coach at Scotibank.
This article is re-published from the May 2021 issue of “Street Talk”, TiF’s flagship publication. Interested in writing for us? Click here for our submission guidelines.