The mutual fund industry in Canada is very successful. Total assets under administration exceed $1.3 trillion and 4.9 million households are owners of mutual funds. In a recent survey, 87% of Canadians said they have greater confidence in mutual funds than other investment choices.
What Canadians don’t realize is the significant cost they bear by owning mutual funds. The average cost of owning a mutual fund investment in Canada is 2.2%. Therefore, if you invest $100,000 in a mutual fund, you pay $2,200 per year for the privilege. This amount is taken out of the value of the fund on a daily basis by the fund manager. He then uses these amounts to pay himself, fund expenses such as trading costs and custodian fees and trailer commissions to your bank of financial advisor.
Furthermore, when you make your initial investment, you may be charged an up front commission of up to 5%. Your advisor will often recommend that you choose a deferred service charge option, which has 0% commission. The fund will still pay a commission of 5% to your advisor but you only get charged if you withdraw your money before 7 years.
The financial market has evolved and there are now funds that are sensitive to the excessive fees charged to investors. Some fund managers offer F-class shares, which do not pay trailer fees. This saves investors 1% per year. New funds are merging which invest in the market using Exchange Traded Funds, which significantly reduces the cost of managing the fund. The result is management expense ratios of 0.5% instead of 2.2%.
Ask you advisor how much he is being paid on your mutual fund investments. Ask how much you will be charged if you choose to sell the fund over a period of time. Finally, explore more cost effective strategies that will give you the same market exposure and lower costs. It’s your money. You should keep it.