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Hi, I'm Bonnie from the Saskatchewan
Pension Plan and welcome again to our
series on Investment Basics. Today we're
going to talk about fees. Let's begin
this segment by stating; regardless of
the type of investment you make, whether
it's in a GIC or a mutual fund, you are
paying fees. In the case of a GIC, the
interest rate you receive is net of the
fees you are paying. When you purchase a
mutual fund the advisor you work with
must tell you how much you are paying
for fund management, sales and other fees.
This information is disclosed on the
Fund Fact sheet. Investment fees do add
up and will affect your savings, so it's
important to pay attention and
understand these costs - and investment
advisors must tell you this information.
So what are fund management fees and why
are they important to you as an investor?
When you invest in a fund you are buying
the expertise of professionals who will
select and manage the investment funds,
and in return you will indirectly pay
the fee for this service. The management
fee encompasses all direct expenses
incurred in managing the investments
such as: hiring a portfolio manager, asset
mix optimization, and risk management. A
fund also incurs operating fees which
include: marketing costs, record-keeping,
custodial fees, legal fees, auditing and
other administrative costs. While these
fees are not directly involved with
making the investment decisions, they are
required to ensure the fund is run
correctly. Together, the management fees
and operating fees make up the
Management Expense ratio or MER. The MER
is a broad measure of how expensive
the fund is to the investor. They are
paid by the fund and are expressed as an
annual percentage
of the average net asset value of the
fund. In general, index and money market
funds charge the lowest management fees
because they require little research or
active management, while equity funds and
particularly foreign equity funds will
charge the highest. Managers of equity
funds must continuously monitor their
investments, and managers of foreign
equity funds generally require more
research in analyzing stock and the
markets they want to invest in. If you
are comparing the MER of different
funds, it's important to make sure that
you're comparing the same type of fund. A
small difference in the MER can make a
big difference over time. For example, if
you make a deposit of $5,000
into a fund that earns a gross
return of 9% a year,
compounded annually, and has an MER of
1%, at the end of 30 years
you'll have a fund worth $50,313. If the
MER is 2%, your fund will only
be worth $38,061 -
a difference of over
$12,252.
Having a clear understanding of
the fees charged by a fund is a
significant component to making an
informed investment decision. Keeping
this cost down is one of the secrets to
building wealth over the long run.
If you have questions about SPP's MER,
contact the number on the screen or
visit us at our website. Thanks so much
for watching and join us next time.
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