What Do the Mutual Fund Classes Mean?

Understand how the same fund can differ, with Morningstar's Director of Investment Research, Ian Tam

Ian Tam, CFA 26 June, 2020 | 1:18AM
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Ian Tam: One of the confusing but important things to understand when investing in mutual funds in Canada is the different types of share classes that are available to you as an investor. Let's have a look at why this is important.

On the screen here you'll see a 5-star rated RBC U.S. Monthly Income Fund. Now, don't be fooled by the four different lines. They are four share classes of the exact same fund. So, when you buy any share classes of this fund, you are getting exposure to the exact same underlying portfolio, but you will see that you get different returns. For example, if you had invested $10,000 in the A Class fund back in 2013, you'd actually end up with 6.8% less wealth today than if you had invested in the D Class fund. The difference is in the fees. In Canada, the share class naming convention actually isn't standardized which is confusing. But broadly speaking, there are three ways or three channels for investors to buy mutual funds.

The first is what we call commission-based advice. And when you buy a fund that has embedded commissions, you pay an ongoing fee to the advisor both as a commission charge as well as for ongoing financial advice. Often these share classes have the highest management expense ratios, also known as an MER, and they also have other transaction costs that happen when you buy or sell a fund.

The second is the do-it-yourself channel which is like buying a fund through a discount brokerage. These share classes are often less expensive but are no-frills which means you won't receive any advice from a financial advisor.

And finally, there is a fee-based advice category which often shows the lowest MER. To access this share class, you must have a fee-based account with an advisor who will probably charge an overall management fee on top of the individual fund fees you are paying for each fund that you own. Fee-based accounts often have a minimum account size and lower MERs. You may see this option if you are a higher net worth investor and qualify for the minimum required investment.

So, regardless of which share class you pick, having a good understanding of how you're being charged is important to maximize the amount of wealth that you end up with in retirement. When in doubt, it certainly doesn't hurt to ask your financial advisor about the different options that are available to you as an investor.

For Morningstar, I'm Ian Tam.

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Ian Tam, CFA  is Director of Investment Research at Morningstar Canada. 

 

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