Seven little-known facts about mutual funds
Before you dive into the mutual fund pool, here are seven things that the fund managers may not mention:
- Funds are more expensive than you think: While management fees are the biggest cost of running a fund, the management expense ratio (MER) of many Canadian funds is among the highest in the industrialized world;
- You’re paying for distribution costs: As much as 1% of the MER is trailer fees, which vary from fund to fund but are essentially salaries paid to advisors and firms that support their products;
- Beware of hidden costs: Brokerage commissions on stock trades are not reflected in the MER, while higher turnover rates can cost you money and burden you with more capital gains taxes;
- Be prepared for a long haul: Beware of funds with deferred sales charges, which could cost you fees of up to 5%-6% of your investment if you decide to cash out early;
- Monkey in the middle: While there is some wisdom in no-brainer index funds, and even a select number of active managers, there’s less to be said for supporting higher-cost “closet index” funds;
- We don’t really get it right all that often: Being right only about one third of the time can be a loser’s game, but that’s where most funds end up;
- Even if you fall short, you may still owe taxes: You could end up owing taxes on distributions even if you don’t sell a unit, or if your units decline in value.
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