Pros and Cons of Mututal Fund

Structure of Mutual Funds
Open-end trust - avoid tax for the fund itself. pass on tax liability to unitholders - most common structure
Mutual Fund company - set up as federal or provincial corporations. investors receive shares, other than units.

How safe is Mutual Fund?

Generally speaking, there is no guaranteed rate of return for mutual fund. You should treat mutual fund more like securities, rather than bonds or deposits. Mutual fund is not insured by CDIC (Canada Deposit Insurance Corporation). However, funds are held in trust, usually a bank, and are protected by banking and trust laws. Investors are also protected by Canadian Investor Protection Fund (CIPF) against insolvency of mutual fund companies.


Who is regulating Mutual Fund?
Investment Dealers Association of Canada (IDA), a self regulatory organization is one of the main national regulator for Canadian securities industry.
Mutual Fund Dealers Association (MFDA) is the mutual fund incustry's SRO for the distribution side of the mutual fund industry.

Mutual Fund Glossary

Management Fee: The fee charged by mutual fund manager for managing the portfolio and operating the fund. Usually set as a fixed percentage of the fund's NAV (Net asset value).

MER (Management expense ratio): The toal expense of operating a mutual fund expressed as a percentage of the fund's NAV. It includes the management fee, as well as other expenses such as administrative, audit, legal fees etc, but excludes brokerage fees. It is deducted directly from the fund's gross return, not paid by the investors.
MER = (Aggregate fees and expenses payable during the year) / (Average NAV for the year) * 100
Note the published rates of return are calculated after deducting the MER.

NAV (Net Asset Value):The dollar value of one share/unit of a fund, calculated as total assets of a fund less its total liabilities. NAV is typically calculated at the close of each trading day.
NAVPS (Net Asset Value) = (Total asset -total liability) / Total number of shares of units outstanding

Front-End Loads:A sales charge applied to the purchase price of a mutual fund when the fund is originally purchased.

Back-End Loads (DSC - Deferred Sales Charge, or Redemption Fee): A sales charge applied on the redemption of mutual fund. Under most circumstances,the longer you hold the mutual fund, the less you will pay for deferred sales charge. The charge can be based on the original contribution to the fund, or NAV at the time of redemption.

Redemption: The purchase of securities by the issuer at a time and price stipulated in the terms of the securities.

Trailer Fees (Service Fee): Fees that a mutual fund pays to the individual or organization that sold the fund for providing services such as invenstment advice,tax guidance and financial statements. The fee is paid annually and continues for as long as the investor holds shares in the fund. It is usually paid out of the fund manager's management fee.

Switching Fee: Fees charged by mutual fund companies when investor exchanges units of one fund to another fund. Most of the companies do not charge for switching funds within the same fund family.