Money market fund MERS

Q – Can you provide an explanation as to why a discrepancy exists between the MERs charged to various money market funds? – J.M.

A – MER refers to management expense ratio. This is the percentage of a fund’s assets that goes to pay for management fees, brokerage charges, taxes, and other related expenses. The MERs on money market funds are lower than on equity or bond funds. However, there is a large variation in the amounts changed. According to figures published by The Globe and Mail, the MERs for these funds range from a low of 0.07% (although that’s an artificial number because extra fees are charged directly to the investor) to a high of 2.50%, with the average coming in at 1.06%.

As a general rule, you’ll find that the funds with the lowest MERs are no-load funds. That’s because no commissions are paid to sales people and in many cases no trailer fees (annual fees paid for as long as you own the fund) are offered either. Together, these costs represent a sizeable chunk of any load fund’s MER.

Generally, the management fee on a money market fund is much less than on an equity fund because runng the fund requires less work and research. However, each company can set its own fee and some charge more than others.

Some segregated funds have higher MERs because of the extra costs involved in providing guarantees, which are unnecessary on money funds.

As a rule of thumb, any money market fund with an MER over 1.50% should be avoided. That’s an excessive charge. Ideally, look for a fund with an MER under 1%. In these times of low interest rates, even a quarter of a percent difference can have a significant impact on your return. – G.P.