Understanding the Fees

If you’re like most people, you either currently own one or more Mutual Funds or at least have owned one at some point in your investing history.    Mutual Funds are the most popular Investment vehicle out there for most Investors but also probably the least understood. 

   A surprising amount of people owning Mutual funds still believe they are a way to invest with “NO FEES.” They believe Mutual Funds are either an exception to the rule or else agree there are costs involved but those costs are paid by the Mutual Fund Fairies who take care of things for them so they can sleep at night!    

Well, nothing is free and there are no such things as Mutual Fund Fairies either. Now before you get all upset with me telling you there are no such things as Fairies and Mutual Funds are no exception to having costs, let’s take a quick look at some of the basic fees with Mutual Funds. 

Before we go any further, I want to make it clear that we are in no way preaching that Mutual Funds are bad and you need to stay away from them. Mutual Funds, like everything else in this World, have a place and can be part of any balanced portfolio. However, the saying goes,

“Don’t put all your eggs in one basket!”

We are merely trying to provide you with information to help you better understand what it is YOU and so many people like you are RISKING your future in by solely relying on Mutual Funds to accomplish your Investment Goals! 

With that said, I am an active Investor. I’m not however licensed to invest for you nor give you Investment advice. I personally invest in the Stock Market, Commodities, Mutual Funds and Real Estate. As you can see, I don’t put my “eggs in one basket”. Again, there is a place for Mutual Funds, however, the key is increasing your FINANCIAL INTELLIGENCE to better understand what it is you are investing in and being able to capitalize on different opportunities and decide which is best for you. 

Let’s begin by talking about the basic fees involved with Mutual Funds. We’re going to break them down into 2 categories;  

1)     Fees paid when you buy Mutual Funds 

2)     Fees paid by the Fund 

Something we need to note on the “Fees paid by the Fund”.   While these are fees paid by the Fund Management, they are indirectly paid by the Investor which we’ll touch on later. 

Fees Paid When You Buy Mutual Funds 

There are basically 3 types of fees here with one falling into both categories. These are the Sales Fees and again fall into 3 types; 

1)     Front Load Fund 

2)     Back-end Load Funds 

3)     No Load Funds 

Front Load Funds 

These are funds that you would purchase where the sales fees are paid by you up front. They are calculated as a percentage against your initial investment and are paid directly to the Dealer; however, they can be negotiated. 

Back-End Load Funds 

These are funds where the fees are paid by the Fund Managers to your Dealer. Something to note here, while these fees are not paid by you, there is a “Redemption Fee”. This fee you will have to pay if you redeem any of your funds within a specified period of time. It typically is 7 years and it does decrease the longer you hold the fund.  

No Load Funds 

These are funds where there is no front or back-end load. That doesn’t mean there are no fees. These types of funds typically have “Trailer Fees” on them. These fees are structured as follows; 

1)     Short Term Fees; if you redeem some units within 90 days

 

2)     Set up fees to set up your account 

 

3)     Annual Fees for RRSPs, RIFS, RESPs 

 

4)     Transfer Fees 

 

5)     Processing fees if you are closing out your account. 

Sales Fees are an area where you have a choice depending on what kind of fund you choose. So remember these different types when choosing your funds. 

Fees Paid By The Fund

A note before we begin the explanation on what these fees are. Although these fees are paid by the Fund, it is important to understand that these are indirectly paid by the Investor which is you. Funds with different MERs and Trailer Fees can have a significant impact on your overall return, so pay special attention to what you’re being charged. 

Management Expense Ratio (MER) 

Most people have heard of MERs but again don’t really understand what those are. The simplest way to explain MERs is the Funds Cost of Doing Business. These fees cover the Management Fees, Operating Expenses and Taxes. Every fund has a different MER. The MER is based on a percentage of the Funds total value so obviously it can vary from Fund to Fund. It’s important to note that while the range percentage wise is small the impact it has on you as the Investor is significant though.  

What I mean by that is Mutual Funds are designed as a long term Investment vehicle. A MER variation of .5%-1% can have a significant impact on your return long term especially when you take into account inflation and the fact that virtually ever Mutual Fund lost between  25%-60% in the market crash of 2008-2009 and has yet to recover! I truly feel for those that had their portfolios decimated. I really do.  

Trailer Fees 

Trailer Fees are paid by the Fund Management Company and are included in the MERs. They typically range from 1% for Front Load Funds and .5% on Back-End Load Funds. The thing to note with Trailer Fees is that it is possible for them to actually increase the longer you are invested in that fund. 

Remember that everything has a cost and nothing is free. Every cost impacts your Investment. A slight increase in any of these fees can have a significant impact on your Investments long term.  

MOST IMPORTANTLY; even if the Fund you are invested in loses money, you still have to pay these fees. Think about it;  Even if the Mutual Fund Manager loses 25-60% of YOUR MONEY, you still have to pay them!  What a great Business that is! 

As I said earlier, the RIGHT Mutual Fund can have a place in a Balanced Portfolio. However, the “Don’t put your eggs in one basket” mentality goes completely against what most “Financial Advisors” tell you. They tell you its less risky because you’re diversified. Well you’re not diversified! If you were diversified, then the market crash we experienced in 2008 would not have wiped out 40%+ of your Portfolio! 

As mentioned at the beginning, I can not provide you with any Financial Advice or tell you where to invest your money. I can however advise you to take it upon yourself and increase your FINANCIAL INTELLIGENCE! Only by increasing your FINANCIAL INTELLIGENCE can you better understand how Investments work, how money works and how to make it work for you!  

FINANCIAL INTELLIGENCE WILL MAKE YOU FINANCIALLY INDEPENDENT!