Saving your money is not enough. If you want to grow your wealth, you also need to invest your money.

There’s no shortage of investment options that you can use to achieve your financial goals.

One of these is investing in mutual funds.

According to Investopedia, a mutual fund is an investment vehicle where several investors come together and pool their money, with the aim of investing in securities such as bonds, stocks, money market instruments and so on.

Mutual funds are managed by a professional money manager, whose aim is to use his/her experience to drive capital gains and income for the investors.

Mutual funds are a great investment option for a number of reasons.

They are professionally managed, therefore they minimize risk by allowing investors to make money even if they have little understanding of investment in securities.

They also provide a great way for investors to diversify their investments.

Additionally, mutual funds allow even small investors to get into huge investments.

This explains why mutual funds are such a popular investment vehicle. Statistics show that in 2017, 44.5% of United States households had invested in mutual funds.

Before investing in a mutual fund, it is important to understand the fees and expenses associated with the fund and their impact on your investment.

Fees are a natural part of the personal finance world, and therefore it would seem logical to assume that everyone understands fees.

However, most people do not understand the fees associated with mutual funds.

One such source of misunderstanding is the difference between the management fee and the management expense ratio.

The confusion has been fueled by the uneven disclosure of some ETF and mutual fund providers.

In this article, we will look at the difference between the two, as well as other fees and expenses associated with mutual funds.

The information about the fees associated with a fund can be found on the fund’s prospectus, as well as other information pertaining to the fund’s objectives.


As the name implies, the management fee, also known as the maintenance fee, is the fees charged for managing the fund.

This charge caters for all the expenses associated with managing the investment, such as hiring and retaining portfolio managers and the investment advisory team, supervision of the fund and support.

The cost associated with hiring the portfolio manager forms the largest portion of the management fees.

This usually falls between 0.5% and 1% of the total fund’s assets under management (AUM). The cost of hiring portfolio managers usually depends on the manager’s reputation, with highly skilled managers driving the costs upwards.

In most cases, a trailing commission may also be included as part of the management fee. The trailing fees is an ongoing payment that is made to the advisor’s firm that sold the fund.

This fee is paid for as long as you hold the fund and is usually determined by the fund manufacturer. The trailing commission covers the following:

  • Access: The cost of the infrastructure that the advisor’s firm provides to support the distribution, sales and servicing of the fund.
  • Advice: This is the expertise provided to clients by the advisor, including things such as portfolio construction, fund recommendation, portfolio rebalancing, continuous monitoring, goal specific planning, tax specific planning, retirement specific planning, and so on.
  • Service: Includes a wide range of services provided by the advisor’s firm, including things like opening and closing of accounts, issuance of account statements and reporting, regulatory compliance activities, client communications, and so on.

The management fee is expressed as a percentage of the fund’s average yearly AUM.

While the percentage might seem like an insignificant portion of the total assets under management, it can amount to millions for funds with assets under management totaling over a billion.

The management fee is a crucial thing to look at because it represents the most expensive cost associated with managing a mutual fund.

Despite being the largest fund expense, the management fee does not provide an accurate picture of all the costs associated with a fund. In order to get a more accurate representation of expenses associated with a fund, you need to look at the MER.


Once you invest in a mutual fund, it is up to you and the other people who have invested in the fund to pay for the costs associated with the administration of the fund.

These are expenses associated with operating the fund other than the costs of paying the investment team and the cost of buying and selling securities.

Despite these costs not being directly linked with the making of investment decisions, they are necessary in order to ensure the proper running of the fund and to ensure that the fund remains in compliance with the requirements of the Securities and Exchange Commission.

These costs are paid through a fee known as the management expense ratio (MER).



Some of the services and expenses that the MER covers include:

  • Administrative costs
  • Marketing costs
  • Employee salaries
  • Legal, custodial and audit fees
  • Research and analytic support
  • Continuous professional portfolio management
  • Costs associated with the provincial securities commissions
  • Regulatory costs: fund facts, simplified prospectus, financial reporting, and so on.
  • Fund valuation costs

The MER also includes something known as the harmonized sales tax (HST).

This is a special tax that is charged on the management and administration fees paid to the fund. The rate of HST is dependent on the residences of the people invested in the fund at a certain point in time.

The MER is usually paid at fund level, which means that the fee is deducted from the fund’s total assets under management before the calculation of net asset value (or individual share value).

Once the MER has been deducted from the total AUM, the value of the remaining assets is then divided by the number of shares to determine the individual share value.

The MER charged by mutual funds can fall anywhere from below 1% to over 3%.

Before investing in a fund, you should always check the performance of the fund and the MER charged by the fund and do comparisons with other similar funds.

Information pertaining to the MER can be found on the fund provider’s website or on third party sites. It is good to note that all fund providers will not use similar language to describe the MER, therefore you need to carefully review the prospectus to understand the actual MER charged by the fund.

You should also keep in mind that the MER is charged regardless of whether the fund does well or not, including if it decreases in value.

While the MER is a better representation of the expenses associated with a fund than the management fee, it does not include all the expenses incurred by the investor.

For instance, the MER does not include the costs associated with trading.

Below, we look at the other costs that are associated with mutual funds.


The trading expense ratio refers to the costs incurred by the fund manager for buying and selling securities.

Generally, the more trades the fund manager makes in a given year, the higher the fund’s TER.

The trading expense ratio is usually expressed as a percentage of the fund’s total assets under management. For instance, if the fund has a portfolio worth $1 billion and it incurs $10 million in trading commissions in a given year, then the fund’s TER will be expressed as 1%.

There are several factors that affect a fund’s TER.

For instance, small-cap funds are likely to have a high TER, while large cap finds will have a lower TER. The age and account size of the fund also affect the TER. Larger size funds will enjoy the benefits of scale, leading to significantly a lower TER. New funds are also likely to have a higher TER.

In addition, the liquidity of securities also impacts the TER. Fund managers that invest in less liquid securities will incur a higher TER, while investing in highly liquid securities will lower the fund’s TER. It is good to note that the TER is independent from the MER.

Since there are a number of factors affecting the TER, you should not evaluate a fund’s TER independently. Instead, you should evaluate it coupled with the skill, strategy, track record and investment style of the fund manager over time.


Apart from the TER, some mutual funds will also deduct sales charges. These are expenses that are incurred when you buy or redeem shares or units in a mutual fund.

These sales charges are also referred to as loads.

It is not unusual for some investors to mistake the sales charge for the ongoing trailing commissions that are calculated as part of the MER.

However, there is a difference between the two. There are usually four types of sales charge structures associated with mutual funds.

These are:

Front-end load

This is also referred to as the initial sales charge (ISC). This is a free that some mutual funds will charge you when you purchase shares or units in the fund.

The front-end load is usually expressed as a percentage of the total amount of your investment, and can go as high as 5%. The front-end load is paid to the firm from which you buy the fund.

The charge is deducted from the initial amount you contribute to the fund. It is possible to negotiate the initial sales charge with your investment advisor before you make the investment.

Back-end load

This is also referred to as the deferred sales charge (DSC). It is a fee that is charged by some funds whenever you sell your shares or units.

If the fund has a deferred sales charge, you do not pay any fee while purchasing your shares. Instead, the charge is pushed (deferred) till you decide to sell the shares.

The deferred sales charge can be as high as 6% of your initial investment. However, there are some rules that govern the operation of deferred sales charges.

Most deferred sales charges have a fixed decline schedule, which means that the longer you hold onto a fund with the SDC structure, the less you will pay when you decide to sell.

For most funds using this structure, if you hold onto the fund over a long period (about 5 to 7 years), the deferred sales charge might have dropped to zero, meaning that you will not pay a thing.

Some funds also allow you to sell a certain amount of shares (usually 10% of your total investment) annually without having to pay any charges.

For funds with a DSC structure, some commission is paid upfront to your advisor’s firm when you buy the shares. Part of this commission will be paid to your advisor.

Any charges that you pay as part of the deferred sales charge then go to the fund provider.

Low load

This is also referred to as a low sales charge (LSC).

In this structure, you pay a lower sales charge upfront (up to 3% of your total investment) when you purchase your shares, and another low redemption charge (up to 3%) when you decide to dispose of your shares.

In some way, the low sales charge is similar to the deferred sales charge in that the fee keeps diminishing over time.

However, the fee diminishes over a shorter time for the low sales charge structure, meaning that if you hold your fund for longer than three years, you won’t have to pay any fees when you sell your shares.

No load

In this structure, no fees are charged for purchasing or selling a fund’s units or shares.

However, this does not automatically make the no-load structure the better deal.

Before purchasing a fund, take the time to compare the performance and MER of the fund to other similar funds.


You might have noticed that most mutual funds are categorized in terms of series and classes, which are usually denoted by a letter.

The class under which a fund falls has an impact on the fund’s fee structure, as well as other features associated with the fund.

While there are no hard rules when it comes to the fee structure for different series and classes, below are some general guidelines:

Series A

This is the most common class that most investors buy into.

Series A funds usually have one or more sales charge options, meaning that series A funds are usually expensive.

The MERs for most series A funds are also usually higher compared to series F.

In spite of this, most investors find themselves buying into this class of funds because it is the one promoted by most investment firms.

The higher costs mean more commissions for the firm, hence they prefer to sell more of this class.

Series D

This class of funds is usually associated with reduced trailing commissions. This class of funds is usually available to investors who buy fund units through discount brokerage channels.

Series F

This class of funds is usually only available to investors who purchase units or shares through an advisor.

In most cases, the investor has to pay a single annual fee in exchange for the services of the advisor.

Alternatively, some advisors might have a fee-for-service plan.

The investor negotiates directly with the advisor and pays any fees associated with the fund to the advisor.

In this case, the fund provider does not pay any commissions to the advisor since the advisor is already charging you for their services.

The result is that Series F funds tend to have lower MERs than Series A funds.

Series I

This class of funds usually targets high net worth investors who are ready to invest about $500,000 or more. However, the amount depends on the fund provider.

In most cases, Series I funds are the preserve of institutional investors, such as pension plans.

Other Series

Sometimes, some mutual fund providers will assign other letters of the alphabet to funds that come with some special conditions attached.

These kinds of funds are usually only offered to selected investors.


Is it really worth paying all these fees in exchange for investment advice?

According to a study done by the Center for Interuniversity Research and Analysis on Organizations (CIRANO) on behalf of the Investment Funds Institute of Canada (IFIC), households that have had a professional financial advisor for four to six years have 1.58 times more assets compared to identical households that have no financial advisor.

The study also shows that the longer the relationships between a household and a financial advisor, the more assets a household is likely to have.

While paying these fees in exchange for financial advice is worth it, it is important to keep your fees low if you want to grow your wealth.

Before investing in a mutual fund, take the time to review all the fees associated with the fund and go for the fund with the highest returns and least expenses.

Obviously, the lower the expenses associated with the fund, the more money you will have when you decide to redeem your investment.

While the fee differences between different funds might seem small and insignificant, they can quickly add up and grow into huge amounts, especially when you are investing over the long term.

To put the impact of these fees into perspective, let us consider two investors putting their money into funds with different MER rates.

For our thought experiment, we are going to make the following assumptions:

  • Each investor contributes $1000 into their chosen mutual fund and holds the investment for 10 years.
  • Each fund has a 5% annual rate of return.
  • Investor A invests in a fund with 0.33% MER.
  • Investor B invests in a fund with 2.18% MER.

After 10 years, their funds will have performed as follows:

  • Each investor will have contributed $10,000 to their respective fund.
  • The fund value (after MER is deducted) will be $12,952 for investor A and $11,619 for investor B.
  • Investor A will only have paid $220 in fees while investor B will have paid $1367.
  • Investor B will have paid 14% of his total contribution as MER, while investor A will only have paid 2% of his total contribution as MER.
  • The total MER paid will represent 12% of total fund value for investor B and only 1.7% for investor A.

In this situation, both investors invest the same amount of money for the same duration in funds with the same rate of return but different MERs. Yet, at the end of 10 years, investor A has made a lot more money than investor B.

If both investors had invested a huge some, say $100,000, the differences in income would be even more glaring. Therefore, you should always consider the expenses associated with a fund before investing.


Having seen the significant impacts of the expenses associated with a professionally managed investment option, you might be wondering if it is possible for you to reduce these expenses and therefore increase your returns.

Sure, there are some investment routes that allow you to lower your expenses. One of these is DIY investing. This is where you kick out the professional manager and run your investments on your own.

While kicking out your manager will not eliminate all costs associated with managing your portfolio, the expenses will be a lot lower.

As a DIY investor, your total expense ratio will fall somewhere between 0.2% and 0.5% of your total investments.

On the flip side, you will need to have experience in securities investing in order to become a DIY investor. If you do not know what you are doing, you risk losing all your money.

Alternatively, you can lower your costs by taking the robo-advisor route. If you do not have much experience in securities investing but still want to lower your investment costs, this is the best option.

With this option, robots and algorithms are used to suggest the best investment options for you.

However, everything is not left to the algorithms. If you need help, you can get human assistance remotely, either over phone, email or through chats.

While the expenses associated with robo-advisors are higher than DIY investing, they are still lower compared to professionally managed accounts.


Saving and investing is important if you want to have enough money by the time you retire.

While it is impossible for you to control the markets, understanding the costs associated with investing and minimizing them can significantly increase your wealth by the time you retire.

Before making an investment decision, sit down with your advisor and have them explain to you all the various costs associated with a specific fund.

Only by understanding these expenses will you be able to make informed decisions.

Remember, while these expenses seem like an insignificant payment for the advice you get, they can add up into enormous figures, especially when you are investing huge amounts of money over a long period of time.

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