Consider TD funds

Each of the big banks offers a dazzling array of mutual funds and you can find some good ones in every line-up. But for across-the-board quality and consistency, I feel that RBC and TD (Toronto Dominion) rank at the head of the class, by a fairly wide margin.

In the case of RBC (Royal Bank) funds, investors clearly recognize a good thing when they see it. The RBC group is the largest stand-alone fund family in Canada, with over $47 billion in assets as of the end of December.

Somewhat surprisingly, however, TD Funds are more than $10 billion behind and don’t even rank as number two among the banks (CIBC has that honour). Well folks, I have to say that you’re missing a good bet here. TD offers a wide range of good funds, across all categories. You can easily build a well-diversified portfolio without ever straying anywhere else.

Check before you buy
Before you plunge in, however, be aware that there are often several different ways to buy the same core TD fund. The original funds are no-load but there are others that are sold only by commission and some which have management expense ratios (MER) that I consider excessive. If you choose theight TD fund but use the wrong purchase option, your return could be reduced considerably. Here is a quick buying guide to the four main types of TD funds on offer.

Investor Series. The “I” units are no-load and are the preferred choice. These are the ones you should be offered if you walk into your local TD bank branch and ask to buy some funds for your RRSP.

Advisor Series. The company offers an “Advisor” series, designated by the letter “A”. These are sold through financial advisors on a commission basis, with front-end, back-end, and low-load options. You’ll be charged a higher MER (with a corresponding reduction in return) if you buy units in this way. For example, the MER on the no-load version of the TD Dividend Income Fund is 2.02 per cent. The “A” series units of the same fund have a 2.31 per cent MER. That means the return from the “A” units will normally be about a quarter-point less than from the comparable “I” units.

GIF Series. These are segregated funds offered in partnership with Manulife Financial. They come with a variety of bells and whistles, including guarantees, but you pay a very high price for those extras – in some cases the MER exceeds 5 per cent. As a rule, I do not advise going this route. To see the impact of the high MER on these units, take a look at the TD Canadian Bond Fund. The “I” units, with an MER of 1.07 per cent, showed a three-year average annual compound rate of return of 8.2 per cent to the end of January. The GIF II units, with a 2.49 per cent MER, returned 6.7 per cent annually during the same period. That’s a tremendous discrepancy. And why do you need guarantees on a bond fund anyway? It’s a waste of money!

On-line Units. This is TD’s bargain basement and you’ll find some terrific values here if you are willing and able to do your fund investing on-line. They’re called “e” units and are available only for Internet purchase. They are not only no-load but they also have a much lower MER. For example, “I” units of the TD Dow Jones Average Fund carry an MER of 0.89 per cent. However, the “e” units have an MER of 0.32 per cent. The difference goes straight to the bottom line, enhancing your returns accordingly. Several index funds are now available with the “e” option so take advantage of it.