Would you ever pay full price for an item at a garage sale? No, of course you wouldn’t. Canada isn’t a nation of hagglers, but we do put our foot down in certain areas of commerce. Add investing in mutual funds to your list.
Today, with the wondrous array of products out there, you should be able to find a fund that fits your purpose but has a lower or no load-fee structure. And this is true whether you work with an adviser or if are a do-it-yourself individual.
Aptly named, load fees are also known as front-end loads, deferred sales charges (DSC), sales charges or redemption fees. They are additional to management expense ratios (MERs), which are fees charged annually for the management of your fund.
By any other name, load fees are a burden to the performance of your mutual fund. Front-end loads are paid upfront, usually five per cent of the value of your investment – meaning you have less money working on your behalf.
For example, suppose there are two similar mutual funds with a six per cent annual return and 2.25 per cent MER; however, one fund has no load, while the other has a five per cent front-end load. The front-end load fund will earn $895.43 less over a 10-year time span.
Check out Get Smarter About Your Money’s excellent mutual fund fee calculator to compare the impact of fees and loads on your investment growth.
DSCs are levied when you sell a fund, but they decline the longer you own it. The charge may start at five or six per cent dropping to zero after six years. There are also low-load funds with DSC schedules that end up at zero after three years. Deferred fees can cost you money because they discourage you from selling even if you have a poor-quality fund.
Smart mutual fund investors aim to minimize or eliminate these load fees.
How to Select a Fund with No Load Fees
I’ve been recommending Morningstar in this series, so fire it up and I’ll show you how to check on your own fund or select one with no load fees.
- Visit the Fund Lookup section of the website. This is where you can choose the category of funds that interest you. I selected Canadian Equity.
- In the Cost and Purchase section, choose a minimum purchase of $500 or less, No Sales or Redem (redemption) for load type and an MER of Category Average.
I usually pick four or five stars for the Morningstar rating; in some categories, too few funds can be found with top marks.
Eleven funds met the criteria, all of them with no load fees. However, you will see that some of the funds are closed to new investors and others are exchange-traded funds (ETFs). You can identify the latter as the word “index” is in the name, although there are some mutual funds that do have index in the name but aren’t ETFs.
You can plug in your own fund name and pull up load information or ask your adviser to help you do it. If your fund levies a sales charge, talk to your adviser about switching it to a no or lower load version.
Next blog, mutual funds brought to you by Sesame Street or the letters A, F, T and so on. These letters indicate different fee levels.