Mutual Fund Fees

1. About MER
MER stands for Management Expense Ratio, represents a percentage of the fund's total assets. It is one of the most controversial topic in mutual funds investing.

• The longer you hold the funds, the bigger the role MER can affect your total return.
• Mutual fund companies charge MER no matter the fund gain or loss.
• MER vary widely, and has no direct link to the success of mutual fund.
• Canadian MER is generally higher than that for US.
• The published mutual fund rates of return are calculated after deducting the MER.

2. About Load
Load is the sales commission investors paid when purchasing the funds. There are three kinds of load:

• Front-end load: Charge the commission when you buy the funds, leave you less money to invest at the beginning. It may have lower MER.
• Back-end load: Charge the commssion when you try to sell the funds. Usually reduce the rate by a percentage every year to encourage you hold the fund for long term.
• No load: No sales commssion while you buy and sell the funds. But they may charge you higher MER for a return.

Mutual Fund Taxes

Depending on the types of mutual fund you are holding, you will be taxed on three different types of incomes.

• Capital Gain
• Dividend
• Interest income

The corporate structure of the mutual fund will also affect the tax levied by the government:

• Mutual Fund Trusts: Mutual fund trust distributes all the income to its unitholders in the same form as it received. So the trust itself does not pay any taxes, and the burden of filing tax is on the investors. Investors will receive T3 slip to illustrate each kind of income generated by the fund within the year.
• Mutual Fund Corporation: Mutual fund company acts like a company to pay income taxes, and declare dividend to its shareholders. So any income you receive from fund company is treated like dividend from a taxable Canadian company, and therefore also eligible for the dividend tax credit.
  
  There wouldn't be any tax savings in terms of the fund structure discussed above. However, the latter structure do simplify your work on tax filing.

Tax efficiency is the amount you get to keep after taxes, relative to fund's nominal total return. If funds return 20%, your net return is 15%, tax-efficiency ration is 75%.