Understanding the expenses associated with a Fund

Most investors are unaware of the costs that are associated with running a mutual fund. More specifically, they are unsure of what a management fee is and how it applies to a mutual fund. Yet the management fee charged by a mutual fund company is one of many important considerations when selecting a mutual fund. Mutual fund companies are required to disclose all expenses of a fund to investors.

Mutual Fund Companies must provide a Simplified Prospectus
Securities regulations require that individuals interested in a fund must be provided with proper information. Information about a fund is contained in a fund’s simplified prospectus. A simplified prospectus is a legal document that contains details about the fund’s policies and operations. It also sets out all fees and expenses charged to an investor or directly to the fund. It is in best interest of the investor to review the prospectus carefully to ensure that the fund’s investment policies and objectives are compatible with their own.

Expenses that a Fund incurs
It is important to understand that a fund operates just like a business and as such, is responsible for its expenses. A fund’s expenses inudes a management fee and operating expenses, and these are charged to the fund.

Management Fee: Management fees cover the cost of hiring experienced, professional managers to make the investment decisions about the fund’s assets, including decisions to buy and sell those assets.

Mutual fund companies charge the management fee directly against the fund’s assets and not to any individual investors. However, the amount charged to the fund varies from company to company and, therefore, may have a significant impact on the rate of return you receive.

Operating Expenses: Operating expenses are expenses other than the management fee. Some of these expenses include:

• Administrative services to investors such as, statements and confirmations of purchase and sale of shares.
• Printing, mailing and preparation costs for quarterly reports, prospectuses.
• Commissions charged by brokerage firms for buying and selling securities, research and tracking of stock prices for monitoring companies the Fund is invested in.
• Costs for annual audit of the Fund and legal fees.

The management fee plus the operating expenses, expressed as a percentage of a fund’s average net assets for a certain period, is referred to as the fund’s management expense ratio for that period. Therefore, it is important when you are evaluating a fund to look closely at these two figures. The management expense ratio, as well as a detailed list of expenses incurred by a fund, can be found in the fund’s annual report. Simply call the fund company to obtain a copy, or your Financial Consultant.

Financial tips courtesy of Merrill Lynch Canada.

Merrill Lynch Canada Inc. is a member of the Canadian Investor Protection Fund.