Today, we live in a world fueled by information. Sometimes it can be overwhelming to make an informed decision. But it’s more important than ever to be an educated consumer.
For example, investing your money in order to make money is a common approach to saving for retirement. Part of the process of investing requires you to examine the costs of that investment, particularly in mutual funds.
If you remember, in an earlier column I explained what a mutual fund is:
“A mutual fund is a pool of money accumulated from investors who have the same general objectives in mind. The mutual fund’s cash is then managed by professional investment advisors who determine where it is best suited to grow. For example, a mutual fund could be invested in a series of stocks or bonds or both.”
There are thousands of mutual funds to choose from, and therefore the fees range depending on the fund(s) chosen. I’ve outlined the various fees below to provide some insight on the costs before meeting with your financial advisor.
Sales Charges, AKA Loads
Loads are a fee paid by you, the investor, associated with buying into a mutual fund. A sales charge/load is generally one way your financial advisor gets paid.
Front-end loads refer to the upfront cost of purchasing a mutual fund. For example, if you invested $1,000 in a fund with a 2.5-per-cent front-end load, this would result in a $25 load fee with the remaining $975 being invested.
Back-end loads refer to the cost associated with taking your investment out of the mutual fund (selling). The cost can range up to 6 per cent depending on how long you remained invested in the fund. Generally, the longer you remain invested the smaller the back-end load fee will be once you sell.
No-load funds exist as well. These are funds generally sold without the advice of a professional financial advisor. However, having the guidance of a trusted financial advisor can be the key to choosing the right mix of funds for your portfolio, hence providing a more favourable investment outcome and thorough financial plan.
Management Expense Ratio or MERs
This fee is not an upfront cost charged to you but rather it is associated with the mutual fund return generated.
The MER is an annual percentage deducted from the fund’s growth. For example, if you invested $1,000 and the fund made 5 per cent, your investment would be valued at $1,050. However, if the MER is 2.5 per cent, your net investment would actually be shown as $1,023.75 since the MER is taken off the initial growth made each year you remain invested.
The MER is broken down to pay several expenses associated with the fund. These expenses can include the following:
- Ongoing (trailing) commission to your financial advisor;
- Operating expenses of the mutual fund dealer (auditing, accounting, record keeping and legal);
- Taxes on the investment purchased; and
- Fund management by the dealer (critical decisions that drive fund performance).
As you can see, it’s quite important to do your research before investing in mutual funds. Always meet with a trusted financial advisor to help guide you on the right path to meeting your financial goals.
Heather Tarnopolsky is a Sun Life Financial advisor in Greater Sudbury.