|
|
|
|
||
| Academic Performance | Financial Survival | Social Life | Nutrition and Health | |||
By
UniversityAdvice.com Staff,
May 2006
|
Mutual Funds With a mutual fund, a large number of investors pool their money together to buy stocks. This allows them to buy a large number of stocks, so as to reduce risk, and to do so cost effectively. As well, there are usually no commissions to buy and sell mutual funds, making it possible to invest much smaller amounts of money at a time. Many mutual funds, for instance, allow you to invest as little as 100$ at a time, which would be impossible with stocks. Mutual funds might charge sales fees. The main types of mutual funds, when it comes to these fees, are "no load", "front load" and "back load" funds. Front load funds charge a sales fee at the time of investment while back load funds defer these fees until you choose to pull your money out. No load funds, on the other hand, charge no sales fees so long as the money is kept in the fund for a specific amount of time (usually 90 to 120 days). There is no compelling reason to pay a sales fee for investing in mutual funds, given that there are plenty of great no load funds available. After all, avoiding fees and commissions is the main reason we are thinking about mutual funds. But sales fees are not the only way mutual funds make money. Mutual funds also charge an annual fee to pay for all of the expenses of administering the fund and to ensure the fund company makes a fat profit for its efforts. This fee is called the management expense ration (MER) and is expressed as a percent. It may range anywhere from as low as 0.17% to 3% and beyond. This means that if you were to invest that 2000$ that you made from busting your ass off at McDonald's all summer in a mutual fund with an MER of 2.5%, you would be donating 50$ a year of your money to the fund company. This doesn't sound so bad compared to the cost of buying stocks if you only have 2000$ invested. And it would allow you to diversity your investments across a broad spectrum of stocks without raking up crazy trade commissions. But consider what this would cost you if you had 150 000 dollars invested as you might hope to have soon after you start raking in the big bucks with your university education. That 2.5% a year would now cost you an astonishing 3750$ per year, which does not compare favourably with purchasing individual stocks at 5 to 29$ per trade. So why would anyone with that much money invest in a mutual fund? Most people who invest in mutual funds in large amounts do so because they believe that the high MERs are somehow justified; that the mutual fund manager will be better at selecting stocks than they would be and that the increased gains accruing from these superior investing skills will pay for the MER. Whether this is so, is debatable. There are however, mutual funds that charge very low MERs that range from 0.31% to 1%. These are "index funds" which aim to track stock market indexes by buying the same companies that constitute the index and passively holding them. An "index" is simply a list of companies that are selected to represent the general stock market. These "passive" mutual funds do not attempt to get higher gains by selecting specific stocks that the fund manager believes will outperform the index as do "active" mutual funds. Because these mutual funds do not need to research stocks, they charge far lower MERs. Although controversial, we believe that these "passive" index funds do, on average, outperform "active" funds and are therefore the best and simplest choice for the student investor. As all index
funds do the same thing, we need only select those with the lowest MER
as that will ensure the highest possible gains. The following is a selection
of Canadian index funds, the Canadian indexes they track and the MER they
charge.
Looking at this table, we see that Scotiabank currently offers the most expensive Canadian index fund while TD Mutual Funds offer the cheapest index fund with its TD Canadian Index e-series. And remember, lower fees = greater returns for us students. And boy are we in need for greater returns after the universities are through with our wallets. The e-series
of index mutual funds offered by TD Mutual Funds currently have an MER
of only 0.31% . They may be purchased directly from TD Mutual Funds by
opening an e-series account at http://www.tdcanadatrust.com/mutualfunds/tdeseriesfunds/index.jsp.
They have no account balance minimums, inactivity fees and the minimum
amount that you need to invest is only 100$. All of which sounds good.
However, although mutual funds might help avoid any disastrous effects
of a particular company becoming less profitable, it is worth noting that
mutual funds are not immune to general trends which might affect all stocks
in the market (e.g., increased price of oil affects all companies, because
the energy needed to melt steel or power computers is now more costly).
Consequently, one must be prepared to deal with these types of situations
before risking cash in the market, especially in the short term. Article
Table of Contents:
|
