What are the costs associated with owning open-end units?

Your costs will depend upon how you purchase the units. Some mutual funds are purchased with a purchase commission commonly referred to as a front-end, front-load,or low-load cost. In this case the commission will be deducted from the total dollar amount of your investment before the units are purchased. The purchase cost is usually expressed as a percentage of the total purchase.

In addition to the sales commission, the advisor/financial planner/ or company holding your account may also be paid an annual trailer fee for each quarter that you continue to hold the investment. The mutual fund company pays the trailer fee from the annual management fee (MER) that you pay.

Another option is for you to purchase the mutual fund with a Deferred Sales Charge (DSC). In this case, you do not pay a commission out of your initial dollar investment. All of your investment is used to purchase units of the fund.

With this option, you will pay a DSC to the mutual fund company if you sell your mutual investment prior to the DSC maturity schedule. The DSC will decline with each year that you hold the investment. The DSC maturity schedule is typically five to seven years long. (see DSC schedule in Mutual Fund Investment Costs section)

The reason for the DSC schedule is to reimburse the mutual fund company for the commission it paid to your advisor on your behalf on the date of purchase. When you purchase a mutual fund under the DSC format, you do not pay any front-end fees or sales commission to the advisor, but the mutual fund company pays them up to a 5.0% commission.

In addition, the mutual fund company may pay your advisor an annual trailer fee for every quarter that you hold the mutual fund investment. This trailer fee is paid by the mutual fund from the annual investment management fees (MERs) that you pay.

The annual investment manager’s fee (MER) and the administration expenses are charged before calculating the mutual fund’s net asset value (NAV), and as a result an investor never sees the expense in their statements.

All mutual funds (closed-end and open-end) publish the fund’s expenses as a percentage of the fund’s assets. These costs are termed the fund’s management expense ratio (MER).  You will find the MER expense listed in the following locations:  the fund company’s marketing literature, online brokerage accounts, and on an individual fund’s website.

If you hold your mutual funds in an account that charges an annual fee, then this would be an additional cost.

Related Questions