You may directly or indirectly pay fees and expenses when investing in mutual funds. These fees reduce the return you get on your investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition in a mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition. Not all mutual funds have the same fee structure. You may pay varying one-time sales charges, ongoing management fees and other transactional costs and account feesAccount fees The fees you pay to a financial institution for transactions and other services related to the operation of an account.+ read full definition charged by the fund company depending on which funds you buy, how you buy them and what accounts you hold them in.
Types of fees and expenses
1. Sales charges
2. Other transaction fees
- Switch fees. A fee which may be charged by a dealer or fund company when you switch from one fund to another within the same fund family. You may be able to negotiate this fee with your advisor.
- Short-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition trading fees. A fee that you may be charged if you purchase a mutual fund and then sell or transfer it within a short time period (for example, 30 days).
- Redemption fees. A fee that you may be charged if you sell your mutual fund within a specified time frame or if you sell above a certain percentage of your investments annually.
3. Account fees
- Registered plan fees
- Minimum accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition balance fees
4. Fund expenses
The fees and expenses a fund pays are deducted from the fund’s assets before a fund’s returns are calculated and published.
- Management fees
- Operating expenses (or a fixed administration feeAdministration fee The fees you pay to a financial institution for activities related to the operation of the account.+ read full definition)
- Trailing commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition (paid from management fees)
- Trading costs
- Incentive or performance fees
Carefully review the fees and expenses of any funds you are considering, even for no-load funds. Even small differences in fees can translate into large differences in returns over time. You can find information about fees in a mutual fund’s Fund Facts and in its simplified prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition. By law, a mutual fund companyMutual fund company An investment company that pools money from investors and invests it in a mix of investments, such as stocks, bonds, and money market investments. Most mutual fund companies offer a choice of more than one fund.+ read full definition must prepare and file these disclosure documents with the securities regulatorSecurities regulator A government agency that enforces the securities act in jurisdiction it has authority over. This act is made up of laws that establish rules for issuing and trading securities. The Ontario Securities Commission is the securities regulator for Ontario.+ read full definition. Beginning May 30, 2016, mutual fund companies are required to give investors a copy of Fund FactsFund Facts A user-friendly guide that provides key information about a mutual fund including fees and performance. Mutual fund companies are required to give investors a copy of Fund Facts before they decide to purchase a fund.+ read full definition before they decide to purchase a conventional mutual fund. Learn more about disclosure documents.
Top 3 costs
1. Sales charges
You may pay a sales charge when you buy or sell units or shares of a fund. These sales charges are also known as loads. Funds may be offered with a front-end loadFront-end load A sales fee that you pay at the time when you buy the investment. It reduces the amount you invest. Also called an Initial Sales Charge. Example: Let’s say that you have $1,000 to invest in a mutual fund with a 5% front-end load. You pay a $50 sales fee and invest $950.+ read full definition, back-end loadBack-end load A sales fee that you pay when you sell an investment. Also called a “deferred sales charge.” The fee often goes down the longer you hold onto the investment.+ read full definition, low load or no load. These sales charges are set by the mutual fund company.
If you have a fee-based account, you don’t pay a sales charge when you buy and sell funds. Instead, you pay a single client advisory fee (typically negotiated between 1% and 2%) every year to your advisor.
Find out which sales charge optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition are available for the funds you’re interested in. Funds may be offered with a front-end load, back-end load, low load or no load.
4 types of sales charges
- Front-end load or initial sales charge (ISC)Initial sales charge (ISC) See Front-end Load.+ read full definition – Some mutual funds charge a fee when you buy your units or shares. This is a percentage (up to 5%) of the amount that you are investing in the fund. The fee is paid to the investment firm that sells you the fund. You can negotiate this fee with your advisor.
- Back-end load or deferred sales charge (DSC)Deferred sales charge (DSC) See Back-end Load.+ read full definition – Some funds charge a fee of up to 6% when you sell your units or shares. Here’s how it works:
- The longer you hold a fund with a DSC, the less you’ll be charged when you sell it. The fee declines every year according to a fixed schedule.
- If you hold it long enough (usually between 5 and 7 years), you won’t pay a fee when you sell your units or shares.
- Some fund companies may also let you take some of your money (usually 10%) out of the fund each year without charging you a fee.
- Your advisor’s firm receives commission (usually about 5%) up front from the mutual fund company when you buy the fund. Your advisor receives part of this commission. Any deferred sales chargeDeferred sales charge A sales fee that you pay when you sell an investment. Also called a “back-end load.” The fee often goes down the longer you hold onto the investment+ read full definition you pay goes to the mutual fund company.
- Low load or low sales charge (LSC) – Low load funds charge a lower sales charge (up to 3%) when you buy your units or shares, and a lower redemption feeRedemption fee A fee that some mutual funds charge when you sell or redeem units. Unlike a deferred sales load, you pay this fee to the fund (not to a broker). It covers the costs of redeeming your units.+ read full definition (up to 3%) when you sell them. You usually won’t have to pay a redemption fee if you hold your units or shares for at least 3 years.
- No load – A no load fund doesn’t charge a fee when you buy or sell its units or shares. A no load fund may not always be a better deal than a load fund. You should compare the MER and performance of each fund before you decide.
Understanding fund series and classes
Many mutual funds are offered in different series or classes, which are identified by a letter. This letter tells you about its fee structure and other features. There are no set rules about which letter goes with which fee structure, but here are a few general guidelines:
- Series A – Most investors buy Series A units or shares, which may have one or more sales charge options. MERs for this series are higher than Series F. That’s because investment firms that sell you the fund usually receive commissions and trailing commissions, which are costs to the fund.
- Series D – These have reduced trailing commissions and cater to investors who purchase them through the discount brokerageDiscount brokerage A brokerage firm that charges lower fees to buy and sell investments, as opposed to a full-service brokerage. Does not provide investment advice.+ read full definition channel.
- Series F – Series F units or shares tend to be available only through an advisor, often through a fee-based account where you pay a single annual feeAnnual fee A fee that is charged on an annual basis. One common occurrence of an annual fee is the fee charged by credit cards.+ read full definition for services or through a fee-for-service plan. You negotiate and pay your fees directly to the advisor. Your fees are based on a percentage of the total assets the advisor manages for you. Mutual fund companies don’t pay any commission to the advisor since you’re already paying a fee. This keeps MERs lower than those for Series A units or shares.
- Series I – Series I units or shares are usually aimed at investors with a high net worthNet worth The value of all your assets, less what you owe.+ read full definition, of more than $500,000 to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition. But that amount can vary depending on the mutual fund company. Series I may also be aimed at institutional investors such as pensionPension A steady income you get after you retire. Some pensions pay you a fixed amount for life. Others save up money for you while you are working. You use that money to create income after you retire.+ read full definition plans.
- Other series – Fund companies may assign any letter of the alphabet to a series of mutual funds with special conditions. They tend to offer these funds only to selected investors. For example, after various fund reorganizations and mergers, a mutual fund company created Class Y and Z series for investors who previously owned the funds involved.
2. Management fees and operating expenses (MER)
The fund’s management fee and operating expenses make up a fund’s management expense ratio or MER. They are paid by the fund, and are expressed as an annual percentage of the total value of the fund.
MERs can range from less than 1% to more than 3%. While you don’t pay these expenses directly, they affect you because they reduce the fund’s returns. This can add up over time.
The management fee paid to the fund management company includes:
- overseeing the fund
- hiring a portfolio manager to make the investment decisions
- hiring other companies to assist in the administration of the fund
Operating expenses include:
- bookkeeping and administrative fees
- marketing costs
- filings with the provincial securities commissions
- legal fees
- audit fees
- custodian fees
Before you buy a fund, check its MER and performance, and compare them to similar funds. The MER is charged whether or not the fund does well.
3. Trailing commissions
Most mutual funds pay a trailing commission (or trailer fee) each year to the company that sold you the fund. They pay this commission for as long as you hold the fund. The rate of the trailing commission is set by the fund company.
Here’s how it works:
- It’s paid out of the fund’s management feeManagement fee A charge that you pay for having an investment professional manage an investment fund. The fee pays the managers for their time and skills. It may also cover things like communicating with investors and doing all the paperwork needed to run the fund.+ read full definition, so it’s reflected in the fund’s MER.
- It typically ranges from 0.25% to 1.5% of the value of your investment each year.
- It is to pay for the services and advice the company and the advisor provide to you.
- The company may pay all or part of the commission to your financial advisor.
Top 3 costs:
- Sales charges (paid by you)
- Management fees and operating expenses (MER) (paid by the fund)
- Trailing commissions (included in the MER)
Use this mutual fund fee calculator to see how fees and other costs can affect your investment.