All mutual funds charge fees, but the fees for some funds are higher than others largely due to the investment strategy of the fund.
The fees an investor pays are referred to as the management expense ratio (MER) of the fund. A fund’s MER is comprised of two parts:
- the management fee; and
- the operating expenses of the fund.
The management fee includes the cost of hiring a portfolio manager to oversee the fund and make investment decisions. This fee is disclosed in the fund’s prospectus. If applicable, trailing commissions to advisors are also paid out of the management fee.
Operating expenses include costs such as fund administration, accounting, audit, legal, custody, regulatory fees, client reporting and harmonized sales tax (HST).
Why Mutual Fund Fees Differ
Mutual fund fees vary depending on the type of securities that the fund invests in.
For example, the cost of running a money market fund that invests in Treasury bills and corporate paper is low because the fund manager does not have to conduct extensive research before making investment decisions. Furthermore, money market instruments are typically investment-grade quality and have a low level of risk, and as a result, the portfolio manager does not have to devote a significant amount of time to managing risk.
In the case of fixed-income funds, which invest in government and/or corporate bonds, the portfolio manager has to devote a greater amount of time and resources to analyzing these securities, prior to investing. Therefore, the MERs for fixed-income funds, which have more expenses than money market funds, are typically higher.
The MERs of equity funds depend on whether the fund invests in a single category of equities such as Canadian equities or in global, international or emerging market securities.
In addition to the cost of the portfolio manager, equity funds may also employ research analysts and risk management professionals to assist in stock selection. The portfolio manager may also incur expenses to conduct onsite company visits and meet with management teams prior to making a decision to invest.
Of note, an equity fund that invests in the equities of a single market, for example, Canada, will have lower expenses compared to an emerging market fund which invests in many different markets, and trades on several exchanges.
Emerging market funds may also use currency hedging strategies to minimize currency risk when investing in different markets, thereby incurring additional expenses.
These unique costs associated with investing in non-traditional markets, result in global and emerging market mutual funds having higher expenses than their domestic, or North American, counterparts.
To learn more about investing in mutual funds, contact your financial advisor today.