Bridging The Gaap

Part 1- My Portfolio -  Part 2- Using Globefund to Analyze Mutual Funds -

Part 3 - Understanding Fund Facts

Using the Fund Facts Report

There is a plethora of necessary and useful information in this section but here are some that you especially need to consider.

Mgmt Exp. Ratio (MER);

This is the Management Expense Ratio, more commonly abbreviated as the MER. This is the portion of your returns that the fund company takes in return for managing the fund you hold. This percentage is taken whether or not you gain or lose money in a given year. The Management Expense Ratio takes the Management Fee (located directly below) into account.

What does this mean for your money? Let’s say you invest into a fund for one year, and that fund returns 10%. Now let’s assume that the fund company has an MER of 2%. This that at the end of the first year, the fund company takes 2% of your return.

Canada is notorious for having some of the highest MERs in the world. They can really take a chunk out of your returns, which becomes more and more important when you consider the effect of losing 2% worth of compounding a year!

Also, if you are considering a fund, get the low down on ALL the fees. Sometimes a company will have a low MER which can skyrocket if they make returns above a certain level. Always do your research: in most cases it just takes a little bit of time and a little bit of Googling.

Load Type:

This ties in with my warning to understand all the fees associated with a particular mutual fund. You should always check to see if a mutual fund carries a load fee: either a front-end or a back-end load fee.

A front-end load fee is a fee charged when you initially purchase your investment. It’s take from the amount you were going to invest, which means you will actually be investing less than you thought. For example, if a fund charges a 2% front load fee and you were going to invest $1000, they will take $20 and now you only have $980 left to invest.

A back end load fee is exactly the same, only it occurs at the time you sell your investments, and the fee is taken from the proceeds of the sale.

You want to make sure you get a mutal fund with NO load fees, also known as a no-load mutual fund.

The fund company/sponsor:
Check out the company and make sure it’s on the level. Make sure it allows you to redeem your fund at any time (one company’s official website states that in order to redeem your investment, you have to write to them a MINIMUM of 10 business days before the end of the month…he-llo…it’s MY money…) http://www.abcfunds.com/en/contact_us/faq.shtml

Globe 5 Star Rating:
Globefund has its own 5 star rating system, with 5 being a strong rating and 1 star being a weak rating.

I do take this into account, but I always perfer to do my own research. After all, if a fund is too risky for your comfort, who cares if it’s a 5 star fund? Go with something your comfortable with: take all the information into account (including the globefund star rating) but make your own descision.

Minimum Investment:

There are two categories for minimum investment, the amount needed for eligibility of an RRSP, and the amount needed for a non RRSP. As always, think critically. Minimum investments of $500 or $1000 dollars are not uncommon. Larger initial investment requirements  (and they can become quite large) does NOT mean the fund will do better, it’s just more expensive to get in.

Restrictions:
In some cases, you will not be able to buy a fund. this is why I chose to use an MD Management mutual fund for this example: MD Management is a financial management company which caters solely to members of the CMA. There are funds meant solely for teachers, and so on. Some are restrictive simply by virtue of requiring high minimum investment amounts.

Top Holdings:

Here is a screenshot of the top holdings for the MD Balanced fund.

The chart will show you what is being held, in what country, what type of asset it is and how heavily each of the top holdings weighs into the fund. For example, the top holding in this fund are some Government bonds, but even the top holding only accounts for ~2% of the portfolio! Look carefull with each mutual fund: the more weight a particular asset has the more sway it will have on the fund’s return it will have.

This can make or break a fund, for me. I once seriously considered purchasing a fund for the long run, until Globefund helped me realize that a whopping 18% of its holdings were in Nortel Networks. In 2007. And yes, it had gone down.

There are some things I have left out, but I feel they are pretty self-explanatory.

Now it’s YOUR turn! What has your experience been using globefund.ca? Have you found it helpful? Is there a particular fund that you did/did not decide to buy that globefund helped you analyze? Has this tutorial been helpful? Let us know by leaving a comment below!

Part 1- My Portfolio -  Part 2- Using Globefund to Analyze Mutual Funds -

Part 3 - Understanding Fund Facts

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