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Part 3: The Top 3 Costs of Owning a Mutual Fund
by Marissa on 

Think back to the car buying analogy.  When you buy and own a car, you don’t just pay the price on the ‘for sale’ sign.  There are additional costs of running the car that you have to pay as well (maintenance, gas, insurance, registration etc…).  The same goes for your mutual fund.  There are regular fees that you’ll pay while you own units of the fund and they’re important to understand because they can reduce the return on your investment.  A fund’s fees are outlined in both the Fund Facts document and in more detail in the Simplified Prospectus.  (If you already own mutual funds, now would be a good time to grab your Fund Facts document  for your fund so you can follow along and see which of these fees affect you!  …Go ahead…I’ll wait!)


Got it?  Ok great! Let’s go…


Welcome to part three of Putting the FUN in Mutual Funds!  …Ok, admittedly, there’s nothing fun about paying fees no matter what the circumstance! But stick with me here because the fees we’re going to talk about today affect how much of your investment returns you keep, and they are an important consideration when deciding what fund to invest in.  So read on, brave one!


Mutual fund fees generally fall into two categories: Sales Charges and Ongoing Fund Fees.  Let’s take a closer look at what these mean:


1. Sales Charges (Loads)
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.  The five most common mutual fund commission structures in Canada are Front-End Load (FEL), Deferred Sales Charge (DSC), Low Sales Charge (LSC or LL for Low Load), No Load (NL) and Fee-for-service (F Class funds).


  • Front-end load (FEL) or initial sales charge (ISC) – You’re charged when you buy your units or shares. This is calculated as a percentage of the amount that you are investing in the fund.  The fee is paid to the investment firm that sells you the fund. The percentage set by the mutual fund manufacturer may be up to 5%, but typically you can negotiate this fee with your adviser.
  • Back-end load or deferred sales charge (DSC) –You’re charged an early redemption fee when you sell your units or shares.  This percentage is typically around 6% in the first year, declining by about 1% each year. Depending on the DSC policy, the amount you pay when redeeming your units may be based on the original purchase price or their current market value when redeemed. 
    The longer you hold units in a fund with a DSC, the less you'll be charged when you sell them. 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. 

    You do not directly pay a sales commission to your adviser, but they receive an up-front commission (usually about 5%) from the mutual fund company when you buy the fund. Any deferred sales charge you pay later goes back to the mutual fund company.  Here’s an example of what a redemption fee schedule may look like (numbers for illustration purposes only)

    When you sell your units:

    You pay:

    In Per cent

    For every $1000 you sell:

    Within 2 years after buying

    5.5% of the amount you sell


    During the 3rd year after buying

    5.0% of the amount you sell


    During the 4th year after buying

    4.5% of the amount you sell


    During the 5th year after buying

    4.0% of the amount you sell


    During the 6th year after buying

    3.0% of the amount you sell


    During the 7th year after buying

    1.5% of the amount you sell


    More than 7 years after buying

    No fee




    • 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 fee (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 (NL) – A no load fund doesn't charge a fee when you buy or sell its units or shares.  It’s important to compare the Management Expense Ratio (MER) and performance of each fund before you decide. No load vs. load is just one part of the decision process.  Typically, this type of fund is sold within financial institutions where the adviser is paid a salary.
    • Fee-for-services (or Fee-based) – Under this structure there is no fee charged to buy or sell units of the fund and you may pay reduced ongoing management fees.  Instead of sales commissions or trailing fees, you pay a fee directly to the adviser for the management and services he or she provides.  You are billed either through your investment account or by invoice from the adviser. Most advisers that design their business to manage investments in this format will have a fee schedule in place that describes the fees they charge.  The fee is typically calculated as a percentage of your assets under administration in the account.


    Remember, when comparing funds, the reported rates of return are the NET returns, AFTER the MER has been taken from the fund.  In the case of fee-for-services, you need to subtract the adviser compensation from the fund performance to reflect the true rate of return.

    Ongoing Fund Fees:
    Ongoing fund fees cover the costs of operating and distributing the mutual fund.  They are paid from the fund assets and consequently reduce your net returns.  They’re made up of management fees and operating expenses and referred to as the:


    2. Management Expense Ratio (MER)
    The MER is paid by the fund, and is expressed as a percentage of the total value of the fund (based on the previous 12 months).  MERs can range from less than 1% to more than 3%. While you don’t pay, or see, these expenses directly, they affect your investment return because they reduce the fund’s return and this can add up over time.  The MER is charged whether or not the fund does well. 

    The management fee portion of the MER is paid to the fund management company and includes:

    • overseeing the fund,
    • hiring a portfolio manager to make the investment decisions, and
    • hiring other companies to assist in the administration of the fund.


    3.Trailing Commissions (Trailer Fees)
    A significant portion of the management fee is used to pay a trailing commission (or trailer fee) each year to the company that sold you the fund.  Fund companies pay this commission for as long as you hold the fund.


    Here's how it works:


    It is reflected in the fund’s MER and generally accounts for about half of the management fees charged to a mutual fund.  You’ll see on the Fund Facts document that although the trailing commission is included in the MER, there is a brief explanation of what portion of the MER is allocated to trailing commission. It typically ranges from 0.25% to 1.5% of the value of your investment each year.


    Trailing commissions pay for the services and advice the selling company and the adviser provide to you.  The company may pay all or part of the trailing commission to your financial adviser.

    In Canada each fund pays its own operating expenses, including:

    • bookkeeping and administrative fees,
    • marketing costs,
    • regulatory filing fees,
    • bank and interest charges,
    • legal fees,
    • audit fees, and
    • taxes


    These operating expenses can fluctuate from one year to the next and are generally allocated to the fund as they are incurred.


    Now you should have a pretty good understanding of what fees you are paying.  For easy reference, download our “Financial Adviser Fees” fact sheet.   Never hesitate to talk to your adviser if you aren’t completely clear about what you are paying for.  It’s your money – and you want the most from it!


    Check out the other posts in this series:

    Do you have a suggestion for a topic, or a question you’d like us to answer?  Get in touch by emailing us  or connect with us on Facebook or Twitter !


    ‘Till next time!

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