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(Arpad Benedek/Arpad Benedek / iStockphoto)
(Arpad Benedek/Arpad Benedek / iStockphoto)

Mutual fund basics

Mutual fund fees Add to ...

Fees reduce the return you get on your investment in a mutual fund. You may pay varying sales charges, other transaction fees and account fees depending on which funds you buy, how you buy them and what accounts you hold them in. You don’t pay fund expenses directly, but they affect you because they reduce the fund’s returns.

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Types of fees and expenses

  1. Sales charges

  2. Other transaction fees

    • Switch fees

    • Short-term trading fees

  3. Account fees

    • Registered plan fees

    • Minimum account 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 fee)

    • Trailing commissions (paid from management fees)

    • Trading costs

    • Incentive fees

You can find information about fees in a mutual fund’s Fund Facts document and in its simplified prospectus. By law, a mutual fund company must prepare and file these disclosure documents with the securities regulator. Beginning June 13, 2014, distribution of the Fund Facts document will be required as part of the prospectus delivery. 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 load, back-end load, low load or no load.

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 (usually 1%) every year to your adviser.

Find out which sales charge options 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

  1. Front-end load or initial sales charge (ISC) – 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 adviser.

  2. Back-end load or deferred sales charge (DSC) – 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 adviser receives commission (usually about 5%) up front from the mutual fund company when you buy the fund. Any deferred sales charge you pay goes to the mutual fund company.

  3. 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.

  4. 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 trailer fees, which are costs to the fund.

  • Series F – Series F units or shares tend to be available only through an adviser, often through a fee-based account where you pay a single annual fee for services or through a fee-for-service plan. You negotiate and pay your fees directly to the adviser. Your fees are based on a percentage of the total assets the adviser manages for you. Mutual fund companies don't pay any commission to the adviser 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 worth, of more than $500,000 to invest. But that amount can vary depending on the mutual fund company. Series I may also be aimed at institutional investors such as pension 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, and

  • 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

  • GST/HST.

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.

Here's how it works:

  • It’s paid out of the fund’s management fee, 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 adviser provide to you.

  • The company may pay all or part of the commission to your financial adviser.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

 

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