Mutual funds and ETFs make up a significant portion of CIRE Element 7. Learn about NAV calculations, MER components, load structures, and the key differences between fund types.
Mutual Fund Structure
A mutual fund is a trust that pools money from many investors to buy a diversified portfolio, managed by professional Portfolio Managers.
Open-End Funds (Standard Mutual Funds)
- Fund creates new units when you buy, destroys units when you sell (redemption)
- Forward Pricing: Orders entered during day, price determined at market close (4 PM ET)
- Liquidity: Can redeem any business day at NAV
Closed-End Funds
- Fixed number of shares issued (like an IPO)
- Shares trade on stock exchange between investors
- Price determined by supply/demand—can trade at premium or discount to NAV
NAV Calculation (Net Asset Value)
Formula: (Total Assets - Total Liabilities) ÷ Number of Units Outstanding
- NAVPS = Net Asset Value Per Share/Unit = the "price" of the mutual fund
- Calculated once every business day after market close
MER (Management Expense Ratio)
The total annual cost of running the fund, expressed as a percentage of assets.
MER Includes:
- Management fee (for the Portfolio Manager)
- Trailing commissions (for the advisor)
- Legal/Audit fees
- GST/HST
MER Excludes:
- Trading costs (brokerage commissions)—found in TER (Trading Expense Ratio)
Impact: MER is deducted directly from fund assets before returns are reported.
Load Structures
| Type | When Paid | Notes |
|---|---|---|
| Front-End Load (FEL) | At purchase | Deducted from investment; often negotiable to 0% |
| Deferred Sales Charge (DSC) | At sale | Fee if sold within 6-7 years; declines over time. Banned for new sales June 1, 2022 |
| No-Load | Never | Common for index funds and fee-based accounts |
Trailer Fees
- Ongoing service fee paid by fund company to dealer/advisor
- Embedded in MER but disclosed in dollar terms on annual Fee Report
- Compensates advisor for ongoing advice and service
Fund Types by Objective
Money Market Funds
- Objective: Safety and liquidity
- Investments: T-Bills, Commercial Paper, Bankers' Acceptances
- NAV: Attempts to maintain constant $10.00
- Risk: Very low, returns may not beat inflation
Dividend Funds
- Objective: Tax-efficient income
- Investments: Preferred shares, dividend-paying common shares
- Tax Benefit: Canadian Dividend Tax Credit
Balanced/Asset Allocation Funds
- Objective: Mix of safety, income, and growth
- Investments: Fixed income + equities (e.g., 60% stocks/40% bonds)
- Manager shifts allocation based on market conditions
Index Funds
- Style: Passive Management
- Objective: Mirror a market index (S&P 500, S&P/TSX 60)
- Cost: Very low MER—no expensive research needed
- Risk: You cannot beat the market; always get market return minus fees
ETFs (Exchange Traded Funds)
A basket of securities that trades on an exchange like a stock.
ETF Advantages:
- Intraday Liquidity: Buy/sell anytime during market hours
- Transparency: Holdings usually disclosed daily
- Low Cost: Most are passive with very low MERs
- Tax Efficient: Fewer capital gains distributions
Disclosure Documents
Fund Facts (Mutual Funds)
- Max 4 pages, plain language
- Delivery: BEFORE accepting purchase order
ETF Facts
- Similar to Fund Facts
- Delivery: Within 2 business days AFTER the trade
Active vs. Passive Management
| Feature | Active | Passive |
|---|---|---|
| Belief | Markets are inefficient | Markets are efficient |
| Goal | Alpha (beat the benchmark) | Beta (match the benchmark) |
| Fees | Higher | Lower |
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