A Scam Called Mutual Fund

If there is any universal piece of advice in the investing world, it should be – “Stay away from mutual funds”.
Mutual funds come with a a little hidden number called MER – the Management Expense Ratio – which looks measly to begin with ranging from 1%-3% (some mutual funds may be as high as 5%).

Do not get fooled by this number because this number is a recurring annual fee and is taken off the overall returns of the fund, so you never see it anywhere on your semi-annual or annual statements reminding you that you just gave a major part of your savings to the fund company.

The Solution

  1. If you are looking for diversification without picking individual stocks, invest using an ETF – Exchange Traded Fund. The ETF fees normally vary from 0.05% to 0.8%. 
  2. A better option is to build your own portfolio. You pay a one time trading fee and no other recurring fees. You have two options – either direct investing via a DRIP plan or through an online discount broker.

Use Case

To best illustrate my point, lets assume you decided to invest in a mutual fund:

  • Initial investment: $10,000
  • Subsequent investments: None
  • Rate of investment return: 5%
  • Mutual fund MER = 2%  (which is a conservative estimate of the funds available in the market).
  • ETF MER = 0.5%
  • Stock investing via DRIP – assuming you buy 10 companies and setup direct investing – the only expense would be the cost associated with obtaining the first share from your peers (which is usually $10).
  • Stock investing via discount brokerage – assuming you buy 10 companies and a trading fee of $4.95 per trade (as offered by Questrade).
Mutual Fund Fees ETF Fees DRIP Investing Brokerage Fees
After 1 year $807 $52 $100 $49.50
After 5 years $1,444 $315 $100 $49.50
After 10 years $2,605 $796 $100 $49.50
After 20 years $6,849 $2,530 $100 $49.50

ETF fees also add up over time, but no where near the rate of mutual fund fees. So, if you are looking for diversification with a fund, it is no brainer to choose ETFs.
If keeping your fees down is your ultimate goal, direct investing either via DRIP or online discount broker is your best option.

If you own mutual funds and wish to find out how much your funds are costing you, click here for a great tool.

Disclosure: I owned about 6 mutual funds until I started realizing the snowballing effects of the fees. I have started trimming them down and currently own two mutual funds. I am hoping to cut back on those two funds in the near future.

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

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