How Do Mutual Funds Work Management Expense Ratio

From The Hoss's Mouth

Hoss Cents Free Financial Money Magazine: How Do Mutual Funds Work? There are many elements to the effective workings of mutual funds(MFs): Management Expense Ratio (MER) is one such element.

MFs, just like a horse race stable, have management and operating costs. Generally, these expenses are charged directly to the fund. All the expenses charged to a MF are contained in the MER. The MER is expressed as a percentage of the fund's assets. A 100 million dollar MF with a MER of 1% would have management expenses of $1,000,000, which would be subtracted from the fund before dispersement. However, that same 100 million dollar fund with a MER of 2% would have management expenses of $2,000,000. The MER has a huge impact on returns , so The Hoss suggests you carefully review the MER before purchasing.

The fees in the MER include, but are not limited to :

* Management Fees: payment to the manager for his/her expertise in managing the fund

* Legal Fees

* Accounting Fees

* Custodial Fees: paid for establishing, promoting and maintaining the MF

* Service Fees: paid to advisers and their firms


Trading costs are hidden fees not included in the MER and must be taken into consideration when asking: How do mutual funds work? Trading costs are the brokerage or commission fees paid for the purchase and sale of the fund's stocks and bonds. These fees are contained within the price of the securities and therefore not visible to holders of the fund. The total trading costs varies depending on how active the MF manager is in trading the fund's stocks and bonds. They are one of the largest expenses a fund has, and it would be inappropriate to ignore this cost in answering the question: How do mutual funds work?


The Small Print:

MFs have other costs that may or may not apply to the fund you are purchasing.

* Set Up Fees: Typically charged by no-load funds and is a one-time fee. Price varies from fund to fund.

* Trustee Fees: Some fund companies charge these fees for registered funds.

* NSF Cheque Charges: If you invest monthly by post-dated cheque you may have a service charge, and if the cheque bounces, expect to pay a penalty.

* Automatic Withdrawal: Some investors choose to receive regular income from their fund and set up an automatic withdrawal. You may be charged either an annual fee or a fee for each withdrawal.

* Switching Fees: Most MF companies permit switching from one fund to another within the same mutual fund company. The wise investor will check and see if fees are charged for this privilege.

* Close-Out Fees: You may be charged a fee to close out your account or transfer to another MFcompany.


At the risk of repeating myself, one must also consider the above fees and charges when one is asking: How do mutual funds work?


The next series of posts from The Hoss will demonstrate various types of mutual funds and the investment strategies employed by these mutual funds.


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The Hoss

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