Anatomy of a Mutual Fund

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Tis’ the season. No, this article is not a month old, and this is not the holiday season I speak of; It is the season in which the consumer, investor and potential saver is inudated with the financial services $6 million advertising campaign.

All shiny and new, your new year’s resolution to get your personal finances in order seems like it may become a reality. You get a sense of entitlement when you see the subway-clad posters directing you to a website that is going to tell you how to get started, and how to actually have some money saved after everything else at the end of the month.

Granted, the vision of personal financial health and its actuality are very different. You begin to look into your options, and quickly feels like a first time home buyer walking in to the housing market for the first time: People are speaking a different language you did not even know existed. Your asked about your view on ETF’s, and warned that the deceptively low fees may result in bigger transaction costs later, and the loss of active management will come down to the overall effectiveness of the fund. Someone delves in to ‘passive management’, when you are still trying to grasp the last point, desperately wishing you had a pen and paper, feeling like you are back in your grade 12 math, as if grade 12 math covered any of this – wondering how cosine ever was more important than learning the tools of constructing a basic financial plan? You remember an e-mail a friend sent about ‘discount brokerages’ accounts, wishing you had asked further what that was. You’re not sure how to even enter the stock market, and think you know enough to write off the ING 2% savings account as not good enough – with all this research, you feel you should be able to find a better return than 2. You return home lost, confused and not any closer to the dream of financial security you crave for your future self, however not before stopping at a few stores on the way home, spending a few hundred dollars, realizing your resolution will have to pushed to the next month, diminishing the chances that you will actually pull through on your new year’s resolution. That evening, you remember the one person you know that works in the financial services industry. Being a long time acquaintance, you know you can ask some no pressure questions without being obligated to make a decision. She explains that there is another option for me: Mutual Funds. Mutual funds, she starts to explain to me, are kind of like watching the highlight reel on TSN when you are not able to actually get to (or even watch the game), in terms of the stock market. Mutual funds, by design, are only allowed to hold up to 10% of any individual stock, meaning one mutual fund has to hold at least 10 stocks, meaning they are diversified by their nature. Even better, after completing a painlessly easy ‘risk allocation’ questionnaire, you are placed into the proper risk category, measuring from conservative to balanced to an aggressive investor. Even better, as you get to be more comfortable with saving and investing, and wanting to know more about your portfolio and investments, you can easily to switch to include companies, industry sectors or other areas you grow an interest in investing in. She continued to say their was no minimum account balances, and that you could start a mutual fund account even if you were only depositing $50 or $100 each paycheck.

As I was trying to wrap my head around this, she made note of a couple things I should be aware of when opening up a mutual fund account. She summarized in the following:

Deferred Sales Charge (DSC)

A sales fee that you pay when you sell an investment, like a mutual fund. Also called a “back-end load.” The fee often goes down to zero after a few years. Also, you may be able to withdraw up to 10% of your investment each year free-of-charge. A deferred load fund is a mutual fund series that has no commission to purchase but is subject to a fund company charge upon redemption. Typically deferred load charges start at around 5% to 7% in the first year, and will decline towards 0% over the next 5 to 7 years. Also known as DSC funds, back end funds or rear load funds. These can be avoided by slecting FEL, or front-end load fee structures.

Book Value

The original purchase price (cost) of your investment plus distributions valued at the time of distribution.

Capital Gains

Profit earned from the sale of real estate, securities, mutual funds or other capital assets.

Dividends

A per-share payment designated by a company’s board of directors to be distributed among shareholders. For preferred shares, it is generally a fixed amount. For common shares, the dividend varies with the fortunes of the company and the amount of cash on hand. It may be omitted if business is poor or the directors withhold earnings to invest in plant and equipment.

Early Redemption Fee

Fee charged to unitholders who redeem or switch out of their units within 30 or 90 days of their original purchase. Should an investor choose to redeem or switch during this time, a 2% fee would be charged and paid to the fund for the benefit of other unitholders.

Foreign Content

The 2005 Federal Budget removed the foreign content limit for registered plans. Customers with RSPs, pension plans or other registered accounts are no longer subject to the 30% foreign content limit. This change means that customers can now exceed 30% in foreign holdings in their accounts without incurring a monthly 1% penalty.

Front-Load

A front load mutual fund is a fund that offers a broker the option of charging investors a commission on the purchase. The commission is charged as a fixed percentage of the gross dollars invested. Also known as Service Charge (SC), Initial Service Charge (ISC), Low Service Charge (LSC), or Front End (FE).

Fund Manager

The individual or team of individuals manages a mutual funds portfolio of stocks, bonds and other securities. The fund manager decides when to buy or sell the securities held in the mutual fund. The fund manager is paid an annual management fee for his or her services. A fund manager is also referred to as a Portfolio Manager, Money Manager, or Mutual Fund Manager.

Fund Sponsor

The name of company responsible for promoting and distributing its fund(s). Most fund sponsors will promote under the same brand name several different funds, often managed by different fund managers. Also known as the Fund Company.

Management Expense Ratio (MER)

Is a measure of the total administrative costs incurred by a mutual fund expressed as a percentage of the assets. These costs include costs incurred in day to day operation of the fund and the compensation paid to the fund manager for managing the investments (management fee).

Management Fee

The compensation paid to the mutual fund manager by the fund company for managing the mutual fund and for supervision of the day-to-day administration and operations of the mutual fund.

No Load

Term used to describe a mutual fund that can generally be purchased or redeemed without a sales commission.

Canadian Balanced

These funds invest in a mixture of primarily Canadian Equities and Canadian Bonds. The ratio of the holdings in these two categories will vary from time to time, but will remain split in a ratio of between approximately 70/30 and 30/70 of the overall portfolio holdings.

U.S. Small & Mid Cap Equity

These funds invest primarily in common shares of US companies with a market capitalization of less than approximately $1.5 billion in the case of small cap holdings and between approximately $1.5 billion and $10 billion for mid cap share holdings.

Sector Funds

Resource

These funds invest primarily in common shares of Canadian corporations involved in the exploration for, mining or drilling of, refining of or production and harvesting of natural resources ranging from pulp and paper to base metals. These funds can also have up to 30% of their holdings invested in companies based outside of Canada.

Precious Metals

These funds invest primarily in the common shares of Canadian domiciled gold or other precious metals producing, mining or exploration companies. Some funds may also choose to hold the physical precious metals commodities as a portion of their investments. These funds can also have up to 30% of their holdings invested in companies based outside of Canada.

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