Understanding Mutual Fund MERs

Before we can fully appreciate whether we are paying too much for our mutual funds, we need to understand exactly what we are paying.

Before we can fully appreciate whether we are paying too much for our mutual funds, we need to understand exactly what we are paying. Jupiterimages/Photos.com

With all the media hype surrounding the high cost of mutual funds in Canada, many investors naturally assume that they are being ripped off. The reality is that yes, fees are high, but there are many other factors to consider before we can say with certainty that you are being taken to the cleaners.

Before we answer the question of whether you are being ripped off, let’s take a deeper look at the cost of a mutual fund. Often times, this is referred to as the management expense ratio, or MER. The MER is really a mix of four different components: investment management, dealer compensation, operating expenses, and taxes. Here’s a quick look at what’s involved with each.

Investment Management

The investment management fee is paid to the portfolio manager and is intended to cover the cost of managing the portfolio. Quite often, the more involved the investment process, the higher the investment management fee.