Time for a pop quiz on mutual funds. What? You didn’t study? Too bad for you. Question No. 1: How much do you pay in fees a year on the last mutual fund you bought? Question No. 2: How risky does the mutual fund company consider your fund? Question No. 3: How much will it cost you in deferred sales charges if you decide to sell your mutual fund within two years of buying it?
Okay, let’s see how you did. Zero for three, eh? I’m not surprised. If you had the time (and who does) you could find most of this information by reading the fund’s simplified prospectus. Unfortunately, a prospectus is about as enjoyable to read as the phone book. Which explains why you just failed my quiz. You never read the prospectus.
The good news is the mutual fund industry may soon have to provide more useful information to small investors. The Canadian Securities Administrators, which represents provincial securities regulators, wants to make it easier for people to understand what they are investing in. The CSA wants mutual fund companies to give investors a two-page document called Fund Facts that lays out the key details of a fund, like how much you’ll pay in fees a year, how the fund has performed over the last 10 years and whether it’s considered risky or not.
You can see a copy of what a typical Fund Facts document would look like here. I recommend checking it out. Though it could be a long time before mutual fund companies actually have to provide you with this type of document, you can use it right now as a template to compare funds. If nothing else, it provides a guide to the types of questions you should ask the salesperson.
I especially encourage you to read page 2. It’ll give you a rough idea of all the fees you might pay to own a fund. The most important fees to keep in mind are MERs, short for management expense ratios. These are the annual fees you’re charged to cover the management, marketing and administration costs of the fund, as well as any fees to the adviser or salesperson.
Though the numbers appear small — MERs often run 2% to 3% — they can take a big bite out of your investment. Plus, you pay even if the fund loses money. Ouch! There can be other fees as well. Some funds have initial sales charges, which you pay upfront to buy the fund. Then there are deferred sales charges, which you pay if you want to exit the fund early.
Mutual fund salespeople won’t necessarily tell you about these charges in their sales pitch. So it’s up to you to ask.