A Mutual Fund is a pooled investment that buys stocks and bonds of individual companies and government bodies. A pooled investment accumulates all of the money from investors and purchases individual investments which make up the Mutual Fund.
According to Franklin Templeton Investments the definition of a Mutual Fund is an “investment portfolio (that) may be invested in one or more asset categories such as stocks, bonds and cash. These funds offer investors the advantages of diversification and professional management, for a management fee.”
How Much Does a Mutual Fund Cost?
A Mutual Fund indirectly charges clients through a Management Expense Ratio or MER. It is indirect because the MER is already withdrawn from the profits before the rates of return are published. The MER covers all administrative and management costs such as the fund managers salary, as well as accounting and recordkeeping costs.
A Mutual Fund company may choose to hire an individual fund manager, or a fund management team. Mutual Fund companies may also charge clients a transaction fee to purchase or sell our Mutual Funds as well as an annual account fee.
What are Mutual Fund Fees?
If we purchase our Mutual Funds directly through our Financial Institution we can save on all extra transaction fees. As an example if we choose to purchase HSBC Mutual Funds through an HSBC bank branch we would save on additional transaction fees. However, Mutual Funds will always charge an MER.
The transaction fees charged by a financial institution or a brokerage firm are called Front End Load Fees or Back End Load Fees. A front end load fee is charged when we purchase our Mutual Fund. It is usually a percentage of the total value of our purchase. A back end load fee is charged when we sell our Mutual Funds; it is also a percentage of the total value of our sale. As time goes by, the percentage of our back end load fee decreases. All back end load fees are usually 0% after a period of 7 years.
Why are Mutual Funds Good Investments?
Mutual Funds are good investments because their risk ranges from low to high, and therefore they are suitable for all types investors. Not all Mutual Funds are high risk. Investors who may not be comfortable with large fluctuations in the value of their Mutual Funds may prefer to invest in low risk Mutual Funds, such as Money Market Mutual Funds or Income Mutual Funds. Low risk Mutual Funds usually invest in short term investments such as banker’s acceptances and treasury bills. They can also purchase local and federal government bonds, as well as bonds of corporations.
High risk Mutual Funds invest in equities and stocks of companies. The stocks can range from large local corporations, to small or medium foreign companies. The investment options purchased in a Mutual Fund depend on the Mutual Fund objectives.
It is important to discuss any Mutual Fund investments with an Investment Advisor before making a Mutual Fund purchase. Investors should also read the prospectus prior to investing. A common investment vehicle in the past has been Globe Advisor mutual funds due to a variety of reasons. Ultimately, the decision you make is up to you.