Mutual fund fees
What you pay and when you pay it.
Management expense ratio (MER)
The MER measures how much it costs to operate the fund each year based on an average of the size of the fund’s assets. These costs include:
- Management fees – These cover the cost of paying the analysts who research potential investments for the fund and the managers who invest your money. These fees also include compensation paid to the fund management company and to dealers as well as sales and marketing costs.
- Operating costs – These represent the costs of running the fund and include things like administration and client service costs, technology expenses, legal and auditing fees and reporting costs (e.g. preparing and filing the annual prospectus).
The MER is expressed as an annual percentage (usually between 1% - 3%). So why are you not “billed” this amount as an annual fee? This is where the concept of net asset value (NAV) comes into play.
NAV = total assets – total liabilities
The NAV is calculated daily to determine the unit price of a mutual fund. Since management expenses and operating costs (as reflected in the MER) are liabilities, these amounts are included in the NAV calculation, which means the MER is built into the per unit price of the mutual fund.
When you buy a front-end load fund, you are paying the sales commission up front, which is usually anywhere from 0% to 5%. Again, this amount is not billed to you, but is instead taken off the amount that gets invested in the fund. For example, if you invest $100 into a fund with a 5% commission, only $95 is actually used to buy units of the fund. The advantage of front-end load is that if you later decide to sell your units in the fund, you will not usually pay any further charges or fees. Front-end loads are also called an initial service charge, or ISC.
A rear-end load fund does not charge an up-front sales fee. Instead, you will be charged a redemption fee if you sell your units in the fund before a certain amount of time has passed (usually seven years). The redemption fee declines every year until it eventually becomes zero. This type of load is also known as a back-end load or deferred sales charge (DSC).
This is a type of rear-end load that offers a shorter commitment length and lower redemption fees.
MERs and loads are just some of the fees associated with mutual funds. You may be charged additional fees for things like transferring funds to another company or selling your units after a short period of time. When you’re investing in a fund, your advisor can clearly explain its fee structure.
Before investing, refer to the fund’s simplified prospectus for full details about the fund’s fee structure.