There are a lot of discussions on how the Management Expense Ratio –or MER- of a mutual fund directly impacts its returns.
As a reminder, mutual funds are actively and professionally managed. It results in a myriad of expenses, paid from the fund, regardless of its performance. These are the MER.
However, there are other charges that you may have to pay out of your own pocket. When reading documents pertaining to a fund, watch out for these common terms:
Front-end load: The amount you pay when investing into the fund. It is usually a percentage, and yes, it is taken out of your money.
Back-end load or sale-deferred charge: The amount you pay when redeeming or selling units. Usually, the longer you keep the fund, the lower the charge will be. After a certain number of years, it is eliminated.
Low load: this works like a back-end load, except the period of time is usually shorter.
No load: means you don’t have to pay to buy or sell units. However, because a fund is “no load” doesn’t necessarily mean it costs less.
Switch fee: amount you pay to transfer into another fund of the same family
Redemption fee: amount you pay when selling; usually a flat fee.
Short-term trading fee: Fee for buying and selling within a short period of time, e.g. 30 days.
Administrative or account fee: some funds charge you a fee if you don’t have a minimum amount invested or to open an account.
Although it is important to understand all the fees associated with a mutual fund, it is not the only aspect to look at before investing.