Mutual Fund Fees and Services Flashcards
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Read the first 6 Mutual Fund Fees and Services flashcards as text
An investor is reviewing the Fund Facts document for a Canadian equity fund. The document lists a Management Expense Ratio (MER) of 2.10% and a Trading Expense Ratio (TER) of 0.15%. What is the total annual cost of owning the fund, as a percentage, that directly reduces the fund's return?
Answer: 2.25%
The total cost of owning a mutual fund that reduces its returns is the sum of the Management Expense Ratio (MER) and the Trading Expense Ratio (TER). The MER covers management, administration, and trailer fees, while the TER covers the costs of buying and selling securities within the fund. Therefore, the total cost is 2.10% (MER) + 0.15% (TER) = 2.25%.
A trailing commission, or trailer fee, is paid out of a mutual fund's management fee. What is the primary purpose of this fee?
Answer: To compensate the dealer and representative for ongoing service and advice to the investor.
A trailing commission is an ongoing fee paid by the fund manager to the investment dealer (and subsequently to the representative) for the services and advice provided to the investor as long as they hold the fund. It is not directly for stock selection (part of the core management fee), trading costs (covered by the TER), or legal/audit expenses (covered under operating expenses within the MER).
An investor purchases a no-load mutual fund. Which of the following fees will they most likely avoid paying?
Answer: An initial sales charge
No-load funds are characterized by the absence of a sales commission, such as a front-end load (initial sales charge) or a back-end load (deferred sales charge). However, they still have ongoing costs, including the MER, the TER, and potentially other fees like short-term trading penalties.
Which of the following costs is NOT included in a mutual fund's Management Expense Ratio (MER)?
Answer: Brokerage commissions for portfolio transactions
The MER includes the management fee, operating expenses, and trailer fees. Brokerage commissions incurred when the fund manager buys and sells securities are separate from the MER and are disclosed as the Trading Expense Ratio (TER).
An advisor recommends a mutual fund with a front-end load (FEL) to a client. The client invests $20,000, and the agreed-upon sales commission is 3%. How much of the client's money is actually invested in the fund?
Answer: $19,400
A front-end load is a sales commission deducted from the initial investment amount. The commission is calculated as 3% of $20,000, which is $600. This amount is paid to the dealer, and the remaining balance of $19,400 ($20,000 - $600) is invested in the mutual fund.
A short-term trading fee may be charged to a mutual fund investor for what reason?
Answer: To discourage frequent trading that can increase fund costs and harm long-term unitholders.
Short-term trading fees are designed to deter investors from frequently buying and selling fund units. This excessive trading activity, often called market timing, can increase the fund's transaction costs (TER) and administrative expenses, which negatively impacts the returns for all unitholders in the fund. The fee itself is typically paid back to the fund, not to the dealer or manager.