How much do you pay for a hair cut? Or for the cost of a babysitter? If you’re like me, you’ve probably got a quick answer for both. But here’s another question: how much does your mutual fund cost? Not sure? That’s not surprising.
Mutual fund fees won’t show up on your credit card statement. Instead, part of the cost of your mutual fund goes into an MER (Management Expense Ratio). That fee is a percentage of the mutual fund’s value, charged to pay for the services of the fund manager, administration and in some cases the advisor who sold you the fund.
Why should you know about your fund’s MER? Because those fees can eat into your savings over time and if you don’t know how much you’re paying, you can’t possibly be sure you’re getting a good value. MERs for stock-based mutual funds in Canada average between 2 percent and 2.5 percent. That might not seem like a lot, but it does add up over time.
Consider this example: Say you invest $50,000 in a mutual fund with an MER of 2.5 percent. You leave it in there for 25 years for an average annual return of 5 percent. Over that 25-year period your investment will have grown to $169,317.75. But with a 2.5 percent MER you would have paid out $62,253.45 — over $12,000 more than your initial investment and about a third of your final total.
My point here isn’t that mutual fund fees are bad — after all, no one works for free. But you want to make sure you’re getting a good value for your hard-earned cash. So it’s important to find out what MER your mutual fund has and how they will impact your savings over time. The Investor Education Fund has a fantastic mutual fund fee impact calculator. It lets you track the performance of any Canadian mutual fund and shows you what you will have to pay in fees.
Note: MERs aren’t the only costs associated with mutual funds. Next week I’ll break down some of the other fees you might be paying.