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As promised, I hope to explain the basics of personal finance on youngandthrifty.ca. So, what REALLY is a mutual fund, you ask?

As promised, I hope to explain the basics of personal finance on youngandthrifty.

Mostly everyone I know has a mutual fund.  So, what REALLY is a mutual fund, you ask?

Mutual funds are a collection of stocks that are professionally managed by a high-paying fund manager.  They collect everyone’s money (or whoever is interested in buying the mutual fund) and then pools it together to buy the selected stocks, bonds, and money market funds that they think will provide good return.

They then distribute the gains (or boooo, losses) back to you, the investor.

Mutual funds can be held in:  TFSA’sRRSP’s and non-registered accounts.

The pros of mutual funds are:

  • Diversification. Everyone in personal finance loves this word.  It decreases the riskiness (so if one stock does poorly, then you might be offset by another stock that does well, in another sector) of your investment.  Because most normal people don’t have the cashola to buy a lot of stocks to diversify, the mutual fund is meant to help you do just that.
  • A Professional Does the Stock Picking for You. A fund manager picks the fruit so you don’t have to worry about it.  These people are trained (hopefully…nervous laughter) to find the best picks the ensure that the fund has a good return of capital.  That being said, many times the S&P index beat a plethora of mutual funds.  Which means that even with professional management, your fund could still suck, and your money could be going nowhere.
  • Guaranteed Principle. Some big banks have mutual fund options that guarantee your principle investment, say if you hold your cash with the bank for a minimum of five years.

The cons of mutual funds are:

  • FEES! The Management Expense Ratio fees aka MER’s are what kills ya.  They can cost anywhere from 1.5 to 3.2% a year, depending on the company.  I was with Investors Group for a bit in the beginning of my foray into personal finance.  The financial adviser I gave my $5000 to neglected to tell me he was making a pretty penny (3.2%) off my investment, he kept saying that they have “no commissions”.  But the MER is sort of like a commission for the financial adviser.  So on a $5000 investment you’re possibly out $175, EVEN if the mutual fund is losing money.  Where does this hard earned money go?  Some of it goes to the fund manager, your financial adviser (so heads up if they seem pretty keen on getting you that fund, because they might be getting a big commission from selling you a piece of the pie, instead), and other costs of keeping the fund professionally managed.  The important piece of this to take away is that if you want that compound interest really working for you, you have to lower your investment costs.
  • Sometimes hard to find how well your fund’s doing. Sometimes it can be hard to find how well (or poorly) your fund is doing.  Sometimes once your financial adviser gets your money and sells you the fund, they become MIA.  This happened to me and I only found out how poorly my fund was doing about a few times a year, when they send you those quarterly statements.  I recently found out you can track your funds ONLINE (just ask your financial adviser for the login addresses and ID’s) and since then, my financial advisers seemed to have smartened up a bit and check-in with me a bit more frequently.
  • Not Traded on the Exchange. Because they’re not traded on the exchange, you don’t have to pay a trading commission each time you buy more of the fund.  Trade commissions can cost anywhere from $4.95 to $29 a pop (each time you trade).

So how does one avoid paying for costly MER’s?  The beautiful balance is to find either an Exchange Traded Fund (remember how I said that the index has historically provided better returns that actively managed funds?) or an E-fund.

One of the ones that I like is the TD E-Series Fund. It has a low MER, I think 0.5% is one of the highest they have.  Because you skip the middle man (the financial adviser, banks etc.) it’s cheaper for you.  Hurrah!  We can have our cake and eat it too.  The trick is that they’re hard to apply for, but once you get it, it’s easy peasy.  In my next post, I’ll talk about how to apply for a TD E-series fund with the least amount of hassle.

What do you think of mutual funds?  Do you like them or do you prefer to use ETF’s?

Article comments

Joe Macartney says:

One disturbing feature of the mutual fund/ETF arguements one reads is that they invariably never mention actual returns by way of comparison. They focus only on fees and ignore actual performance. A focus on planning and seeking an investment that meets your plan may be a better way to approach the situation than the type of formulaic preconceptions you seem to be recommending. For example, if I find a fund that returns 9% on average (and they do exist) and I have an ETF that only returns 6% the savings on fees that result (and to be clear that is results after fees) from owning the ETF are not helpfull to my long-term plan if I need 7 or 8% to make it work. I have the satisfaction of having saved on fees and preventing all manner of middle-men from profiting, but am out by 50% on performance. Sounds a little like cutting off my nose to spite my face: the price of having a closed mind.

Just as an aside the assumption also always seems to be that everyone is in the same risk management category as well. Some funds (and some ETF`s perform at a lower level simply bcause they hold more conservative investments. One rarely, if ever, hears that discussed.

young says:

@JOe- Fantastic point, Joe. Definitely I have had mutual funds in the past where they were managed so well that I had some great returns. There are funds that aren’t managed so well and unfortunately lose you money (I have had these in the past too). I agree with you Joe, thanks for bringing up this often unstated point.

MJD says:

“But the MER is sort of like a commission for the financial adviser.” Not true at all. MER is the cost of that Preofessional Stock Picking you pointed out under the Pro column. Your financial adviser would get any commission (front load, DSC, etc.) plus a service fee, but definitely not anything close to the MER.

TD E-series funds have lower MER’s because they are index funds. So there is little need for professional management to actively re-balance portfolios, they have fewer transaction fees, etc.

You have a good understanding of some investment principles, and write some useful things for DIY investors, which is great. But I think if you’re going to bash a good chunk of the financial services industry, you should at least be better informed in the details and stop generalizing so much (in some of your other related posts).

young says:

@MJD- You’re right, the financial adviser would get a portion of the MER, but not all of it. Still- it’s a lot of money to pay up, especially if the returns aren’t anywhere near the standard 8% per annum. Sometimes I have a bad habit of ‘generalizing’ and ‘over simplifying’, so I apologize- it can be helpful when explaining something and garnering understanding but also not helpful at other times, of course. I do not claim to be a financial guru, or even a financial adviser myself.

Tom says:

Great article! I think this is exactly the way teaching young people is going to happen. Clearly broken down in simple terms – well done.

young says:

@Tom- Thanks Tom 🙂 I like to break things down in simple terms.

Big E says:

Good post, thanks. I dabble in both mutual funds for my RRSP and e-Funds for my TFSA. I track both to compare their performances.

One thing of note about mutual funds – the return you see is AFTER the MER is paid.

I bank with TD so setting up an account to purchase e-Funds was relatively easy, just opened a discount brokerage account.

young says:

@Big E- Yes- thanks for mentioning and reminding us that the return you see is AFTER the MER is paid. So if the market is doing poorly, it’s going to do 2.45% worse lol.

Alex says:

most index funds actually have lower minimums (although the rule of thumb for mutual funds is $500).
bmo in particular just recently got into the ETF business and they a great lineup (with some of the lowest fees in Canada).

thanks for feedback on the site, you can actually use it right now to check on fund’s fees, minimums, etc – just go into Filter Results there and all those parameters you can adjust to fit you

Alex says:

@ youngandthrifty
one thing to add on mutual fund fees – there is no real difference between ETFs or Mutual Funds in terms of fees (i mean like legally ETFs are not required to have smaller fees or anything like that). The lower fees come from the fund being an index-fund, i.e. it’s an easier job for a manager to pick investments (just buy/sell same as the index), hence they charge less.
There is quite a range of index mutual funds with fairly low fees (BMO has a line of index funds, RBC as well, almost everyone).

young says:

@Alex- Thanks for visiting. I checked out your site- fantastic idea! I’ll book mark it =) Good to know there’s a go to place to check out hte fees. The index mutual funds that BMO offers, don’t you need to have a high minimum amount (like 10K?)

Alex says:

@Financial Cents
I wouldn’t be too reliant on past performance of the fund, trying to justify it’s high MER. There is no formula to finding a great mutual fund, but looking solely at performance is definitely not a way. On top of that when those funds DO manage to beat the index they don’t beat it by a 10% margin, lots of time we are talking 1% or in the range, which can be eaten up by fees in the end.

Mrs. Money says:

Great explanation! I think mutual funds and investing are scary things to some people.
.-= Mrs. Money

Little House says:

I’m looking forward to your next post on the TD E-Series. The mutual funds just don’t excite me. And now, with your mention of the fees, they definitely don’t sound terrific. 😉
.-= Little House

Balanceena says:

How is it a con that you don’t have to pay a trading fee?

young says:

@Balanceena- The trading fees can be quite costly, especially if you plan to do “dollar cost averaging”. It has hindered me from averaging my investments in my BMO investorline account because it’s $30 bucks a pop (each trade). With mutual funds, you don’t haev to pay a trading fee but you have to pay for the MER.

Hey Y&T – I’m not a big fan of mutual funds…more of an ETF fan myself, but even some that charge higher-MERs are good performers and worth holding. Any of the big bank funds that have “dividend” or “dividend growth” in their names would be good ones to hold, IMO.

The Globe’s Shirley Won agrees with me 🙂


Are you holding any Y&T?

Good overview about funds in your post!
.-= Financial Cents

young says:

@Financial Cents- Thansk for writing! I have ETF’s too! And plan to add more to the mix =) I like a mixture of both. I put $200 into my mutual funds each month, kind of a “no brainer” dollar cost averaging type thing I do.