Decoding the mutual fund alphabet soup

Bewildered by all of the labels on investment funds? You’re not alone.

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Mutual funds are supposed to take some of the pressure off investors, who are either not interested or find it too expensive to build a portfolio on their own. Yet a lot of investors feel overwhelmed by all the choices in mutual funds.

If it wasn’t hard enough to know what type of fund you want to own, different series and classes of funds—denoted by different letters—add to the confusion. A single TD mutual fund, for instance, can come in a d, e, h, f, t, s, q and o-Series. It’s a veritable alphabet soup.

Nick Dedes, a Toronto-based fund analyst with Morningstar, says the letters often relate to the fund’s minimum investment threshold and fee structure. TD’s o-Series funds are no-load investments with high minimums; its e-Series funds are no-load funds specifically for its brokerage clients who buy online, while the bank’s f-Series funds target clients with fee-based financial advisers. The list goes on.

While figuring out what each letter means is confusing enough, Dedes says the various fund companies each use the letter categories differently, with the exception of f and t-Series funds (t-Series, or tax efficient funds, offer investors a return of capital). “There really isn’t any regulation from the industry,” he says. “They’ve left it up to the fund companies to come up with the labelling and it can get quite confusing.”

Dan Hallett, vice-president and director of asset management at Highview Financial Group, agrees that it’s complicated, but with a little due diligence he says it’s easy to sort out what the different letters mean.

The details are often explained on the prospectus which you can find on the fund company’s website or on sedar.com, a website that lists a plethora of information on specific mutual funds.

After you do a little research you’ll likely find that you can only buy one specific series. If you only have $500 to spend you won’t be able to buy the fund series that requires a $50,000 investment. If you do have a lot of dough, you’ll buy the fund with the higher minimum because it often comes with cheaper fees.

Do-it-yourself investors only get one option online so there’s no risk of making a mistake. “Discount brokers default to the version that you have access to,” says Hallett. “That’s typically one series per fund.”

It may look like each series operates as its own fund, but all the money is pooled together and invested by the manager, explains Hallett. The return may differ slightly between series, but that variation would be due to fees; Performance should be identical between each series.

If you’re not an online investor Dedes suggests talking to an adviser who will know what all the different letters mean and which one suits you best. Ultimately, the letters serve a purpose, says Dedes. It gives investors options that allow people to make better investment decisions and to save money on fees.

Still, until there’s some uniform system, the alphabet soup of funds will continue to bewilder investors. But if it’s any consolation even the experts find the system baffling. “It’s frustrating for us and we look at this stuff on a daily basis,” says Dedes. “I can only imagine how hard it is for the average investor who’s trying to figure out the differences between each.”

One comment on “Decoding the mutual fund alphabet soup

  1. Could you write your next article expanding the first sentence? You mention mutual funds are great for someone who finds DIY portfolios too expensive. I am confused because the average MER for a mutual fund is 2.6% while passively managed ETFs representing an index have MERs between 0.07%-0.55%. Is there a new brand of mutual fund that is less expensive?

    Reply

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