Friend or Foe? I don’t even know yet when I am talking about a Primerica ambassador called “V” (or is it V for Vendetta?). If you are curious about “V”, you should read comments following any of my Primerica posts. He(she?) pointed some good questions in his latest comment about Mutual Funds. I thought I would write a full post about as it will probably be relevant information for several readers. Here was the question:
“I hear a lot of people talking about the turnover ratio in mutual funds. How exactly does the buying (and more specifically) the selling of funds by clients, affect the overall performance of a mutual fund.
Another concern of mine is the whole issue surrounding MERs and fees associated with mutual funds. If my fund is reporting a 10% rate of return, isn’t that After the 1.5% or 2.3% MER has been deducted? Meaning, if a fund reports 10% rate of return it really did 12 %or 13% before fees were deducted? The reason I ask is because, if my fund is averaging 10% after fees, why do I care about the fees? 10% is 10%. Ultimately, that is the goal I am concerned with – hitting 10% or better on my overall performance. So, even if the MER was 5%, if the fund is averaging 10% over a 20 year period, should I really care?”
There are actually 2 types of turnover ratio. The first one is related to the assets within the mutual funds. A higher turnover ratio means that the fund manager is trading more actively and changes his positions on a regular basis. If you believe in passive investing, this is probably not the right fund for you. The other impact is that you will have a lot of capital gains showing on your income tax form every year (unless he is losing money!). Since one of the major advantage of capital gains is to be reported in the future, there is not much incentive to cash in your capitals gains years after years.
When we are talking about turnover ratio in regards to the number of fund units being traded on the market, it has no or little influence on the fund performance itself. Most mutual funds are big enough to overcome daily trades and not to sacrifices good investment in order to reimburse holders of the mutual funds. It could affect the fund’s return if there are too many units for sell at the same time compare to the size of the funds. I guess you would see such phenomenon for small and private funds.
However, you have to be certain that your funds post after MER’s returns (some of them don’t). The other thing to consider is that those fees are always grabbing a part of your profit. Therefore, if they are too high, they might impact the long term performance of your funds. If you are paying a 3% MER’s and you barely makes the Index, it means that the fund manager is making money on your back and you simply get an additional risk compared to ETF’s.
I hope I answered all your questions, if not, please feel free to add your comments 😀
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