Are you paying too much in mutual fund commissions and management expense ratios?
By Eunice Luis
Published in Port Credit Harbour Lights
Like most investments, all mutual funds charge fees and expenses that are paid by investors. These fees and expenses can vary widely from fund to fund or fund class to fund class. Even small differences in expenses can make a significant difference in your returns.
What are Expense Ratios?
A mutual fund's expense ratio measures the fund's total annual expenses expressed as a percentage of the fund's net assets. For example, an expense ratio of 1% represents an annual charge to the fund's net assets - including your proportional interest in those assets - of 1% every year.
Expense ratios can vary depending on fund type and whether a fund was purchased as front (sales commission) or back load (deferred sales charge). The expense ratio includes the asset-based sales charge and other ongoing fees that are deducted from a mutual fund's assets to pay for the services of the mutual fund's investment advisor or transfer agent or for other expenses. The fee table in the front of a mutual fund's prospectus provides the amount of a mutual fund's expense ratio and its front-end sales charge and DSC.
What are Deferred Sales Charge or DSC?
This fee is charged when you sell your mutual fund shares. For example, if you redeem shares valued at $1,000, and the mutual fund imposes a DSC of 1%, you would receive $990. This DSC normally declines the longer the shares are held and eventually is eliminated after a number of years, often in the seventh year that you own the shares.
Front-End Sales Charge
This fee is charged when you purchase mutual fund shares. For example, suppose you wish to spend $1,000 to purchase Class A shares, and the mutual fund imposes a front-end sales charge of 5%. You will be charged $50 on your purchase, and you will receive shares with a market value of $950.
When permitted by firm policies, the individual advisor can exercise discretion on how much to charge a client, it can be anywhere from 0 to 5%. For example, at Portlington Financial Group all mutual fund purchases of front end sales are at 0% commission.
Other investment firms may offer you discounts, called breakpoints, on the front-end sales charge if you make a large purchase; already hold other mutual funds offered by the same fund family and commit to regularly purchasing the mutual fund's shares.
For more details on these topics and to learn how distributions affect your funds, attend our upcoming seminar on Tuesday September 21st, 2004. To reserve a seat call Eunice Luis at 905-274-7820 or email Eunice@portlingtonfinancial.com.
