Understanding Mutual Funds
Why invest in mutual funds?
When you buy a mutual fund, you are pooling your money with other investors, allowing you access many investments at a relatively low cost. A portfolio manager makes the buying and selling decisions within the mutual fund on your behalf. Mutual funds are liquid meaning that you can buy and sell at any time.
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 may also include trailing commissions — an annual service commission usually ranging between 0.25% to 1%.
What are the Sales Charges?
There are four main types of sales charges:
- Front-end load (FEL) — A negotiable sales charge generally ranging from 0% to 5%, deducted from your initial investment.
- Back-end load / DSC — No sales charge at purchase; if you sell before a set period (usually 5–7 years) you pay an early redemption fee. No longer eligible for new purchases.
- Low load (LL) — Similar to DSC with a shorter holding period and lower redemption fees. Also no longer eligible for new purchases.
- No load — No sales charges to buy or sell.
In a fee-based account, there are no sales charges and no trailing commissions. Instead, you pay an annual fee based on a percentage of total assets managed.