Mutual funds: NAV, MER, loads and objectives

What a unit is worth

Northshore Balanced Fund holds $482,000,000 of securities and cash, owes $6,000,000 in accrued fees and pending settlements, and has 19,000,000 units outstanding. Its net asset value per unit:

$$\text{NAV}=\frac{\text{assets}-\text{liabilities}}{\text{units}}=\frac{482,000,000-6,000,000}{19,000,000}$$

=(482000000-6000000)/19000000 = 25.0526.

An open-end mutual fund issues and redeems units itself, at NAV. The NAV is struck once a day, after the market closes — so an order placed at 11 a.m. is filled at a price nobody knows until that evening. That is forward pricing, and it is why a mutual fund cannot be day-traded. New money adds assets and units in the same ratio: a $20,000,000 inflow at today's NAV buys 798,319 units and leaves the NAV at 25.0526 — inflows do not change the unit price.

Loads — what a purchase actually buys

An investor sends $10,000. With a 3 % front-end load, 300 goes to the dealer and =10000*(1-0.03)/25.0526 = 387.18 units are bought. With no load (a no-load fund, or a series without one), =10000/25.0526 = 399.16 units. A deferred sales charge instead takes a declining percentage on redemption within the first years. The load is paid once; the fee that matters more is paid every year.

The MER — the fee you never see

The management expense ratio (MER) — management fee plus operating costs plus taxes, as a percentage of assets — is deducted inside the fund before the return is reported. A fund that earned 7 % gross with a 2.2 % MER reports 4.8 %; the investor never receives an invoice. Compound it. $50,000 for 25 years at 7 % gross:

=50000*1.07^25 = 271,371.63

At 7 % − 2.2 % = 4.8 %:

=50000*(1.07-0.022)^25 = 161,436.63

The MER took =1-161436.63/271371.63 = 40.5 % of the terminal wealth — Module 6's compounding, working against the learner. Part of the MER is the trailing commission (trailer) paid to the dealer for as long as the units are held. Since 1 June 2022, under amendments to NI 81-105, funds may not pay trailers to order-execution-only dealers — the discount brokers that give no advice. Every fund must deliver a Fund Facts document (NI 81-101) before or at purchase: two pages with the MER, the risk rating and past performance.

Fund types, closed-end funds and segregated funds

From lowest risk to highest: money-market (T-bills, commercial paper; a stable NAV), fixed-income (bonds), balanced (a fixed mix of bonds and shares), equity (shares — domestic, global, sector), and index funds that hold a benchmark's constituents at a low MER. A closed-end fund issues a fixed number of units once and then trades on an exchange like a share — at a premium or discount to NAV, because nothing forces its price to it. A segregated fund is a life insurer's version of a mutual fund wrapped in an insurance contract: it carries a maturity guarantee and a death benefit guarantee (typically 75 % or 100 % of deposits), potential creditor protection, and a higher MER for the insurance; Assuris backs the guarantee if the insurer fails.

Objectives and constraints pick the mix

Five things decide what a client should hold: return objective, risk tolerance, time horizon, liquidity needs, and tax situation (plus legal or personal constraints). A 28-year-old saving for retirement — long horizon, high tolerance, no liquidity need — sits mostly in equity funds. A retiree drawing income — short horizon, low tolerance — sits in fixed-income and balanced funds with a money-market reserve. A couple saving a house deposit for two years holds money-market: the horizon rules out equity however high their tolerance.

Recompute

NAV after the 20,000,000 inflow: unchanged at 25.0526. Cold: NAV = (assets − liabilities) ÷ units; the MER is inside the fund; the five factors are return, risk tolerance, horizon, liquidity, tax.