Understanding Mutual Fund Costs
What are the costs?
Mutual fund costs can vary widely from fund to fund. You can find information about a mutual fund’s costs in the prospectus and/or the fund facts sheet. Generally, the main cost categories are Management Expense Ratio and Sales Charges.
What is Management Expense Ratio (MER)?
A management expense ratio (MER) is made up of management fees, operating fees and taxes charged to a fund during a given year expressed as an annual percentage of the fund’s total assets. Management fees include the fees paid to the manager for professionally managing the fund. They may also include the trailing commission paid to an advisor and their firm for ongoing advice and service. Operating fees include the fund’s day-to-day operating expenses. Each fund is also required to pay taxes on management fees and administration fees charged to the fund.
What are trailing commissions?
As mentioned above, management fees may also include trailing commissions. The manager pays portion of its management fee to the advisor and their firm that you deal with as a trailing commission for the ongoing advice and services they provide to you. It is an annual service commission that is set by the fund and usually ranges between 0.25% to 1%. It is paid to your advisor and their firm as long as you own the fund.
What are the sales charges?
You may incur sales charges when buying or redeeming a mutual fund. Sales charges are separate from the Management Expense Ratio (MER) and should not be mistaken for the trailing commissions that make up part of the management fee. There are four main types of sales charge options.
1. Front-end load (FEL) or initial sales charge (ISC). This is a negotiable sales charge generally ranging from 0% to 5% that is deducted from your initial investment and is paid to your advisor and their firm at the time of purchase.
2. Back-end load or deferred sales charge (DSC). You don’t pay a sales charge at the time of purchase. Instead, the advisor and their firm is paid generally 5% by the fund company. However, if you sell the fund before a certain date (usually five to seven years) you will pay an early redemption fee to the fund company. Generally you are allowed to redeem 10% of the fund annually at no cost. The redemption fee goes to the fund company as a reimbursement for the fee that the fund company paid the advisor when you initially bought the fund.
3. Low load or low sales charge (LSC). Similar to a DSC, you don’t pay a sales charge at the time of purchase. Instead, the fund company pays generally between 1% and 4 % to your advisor and their firm. The holding period to avoid any redemption fees is shorter and is typically three years and the redemption fees are also lower.
4. No load. Usually these funds are purchased from banks and there are no sales charges to buy or sell.
Like all funds, you must compare the MER and performance of each fund before you make a decision.
Note: If you have a fee-based account, there is no sales charge when you buy and sell funds and no trailing commissions are paid to your advisor and the firm. Instead, you pay an annual fee, usually charged monthly, to your financial advisor and their firm. You may be able to negotiate this fee, which is often based on a percentage of the total assets your advisor manages for you.
You may be charged other fees in addition to the sales charges and MER discussed above. Please always read the fund facts sheet prior to investing.