Management cost to management cost ratio: Overview
Trustees are a great way to invest in the stock and bond markets without taking any particular equity risk. A team of investment professionals can manage these funds and provide a variety of ways to enter the market. Choosing a mutual fund requires careful consideration of individual goals that match the purpose of the fund. The cost of a mutual fund is an important factor in deciding whether to invest in a fund.
Fees related to investment trusts include sales fees, other transaction fees, account fees, and fund costs. Fund costs include administrative and operating costs. Investors often confuse management fees with management cost ratios (MERs). Management fees are often used as a key determinant in making investment decisions, but MER is a broader indicator of how expensive a fund is to investors.
- Management fees are often used as an important determinant when making investment decisions.
- MER is a broader measure of how expensive a fund is to investors.
- The MER may be lower than the management fee.
Trustees charge administrative costs to cover operating costs, such as the costs of hiring and maintaining investment advisors who manage the fund’s investment portfolio and other management costs not included in other cost categories. Administration costs are commonly referred to as maintenance costs.
Investment trusts bear a number of management fees related to fund management, in addition to payments to the investment team that buys and sells securities and makes trading decisions. These other operating costs include marketing, legal, auditing, customer service, office supplies, and filing and other administrative costs. These fees are not directly involved in the investment decision, but are necessary to ensure that the trust is properly executed and within the requirements of the Securities and Exchange Commission.
Management costs include all direct costs of managing an investment, such as hiring a portfolio manager or investment team. The cost of hiring a manager is the number one factor in administrative costs. It can be between 0.5% and 1% of the fund’s assets under management (AUM). The amount of this percentage seems small, but the absolute amount of a trust with a billion dollar AUM is in the millions of dollars. Depending on the reputation of management, highly skilled investment advisers can order fees that make the fund’s overall cost ratio very high.
Management cost ratio
In particular, the cost of buying and selling securities of the fund is not included in the management fee. Rather, these are transaction costs and are expressed as transaction cost ratios in the prospectus. Together, operating and administrative costs make up the MER.
The fund prospectus provides the fund’s expense data each year. Management fees are important to funds as they are the most costly part of managing a mutual fund to hire and maintain an investment team. Therefore, management fees are often cited as review fees. However, checking the MER is a better way to determine how the fund company manages the costs associated with managing the fund.
Depending on the language used by the investment trust company, it may not always be easy to see these fees in the prospectus. Most companies label management fees as-is, but there are several ways to label MER. Below are some examples from a real fund company prospectus.
Fund company # 1
Management fee: 0.39%
Total annual operating expenses: 1.17%
Individual investors need to calculate the MER. In this case it is 1.56 percent.
Fund company # 2
Management fee: 1.80%
Fund costs indirectly borne by investors: 2.285% (expressed as $ 22.85 for every $ 1,000 investment)
The language used to describe the MER may not be uniform across fund companies, so the prospectus should be carefully considered.
Impact on returns
If the prospectus states “funds indirectly borne by the investor,” the keyword is “indirect.” Investors do not receive an annual invoice for the fund’s costs, but are charged through a reduction in the return paid by the fund.
However, to facilitate the review of the prospectus, the mutual fund company needs to show the performance of the fund after deducting costs. By displaying the cost-deducted return, the company is clear to the investor when deciding whether to invest in the fund or to return to the investor what the fund is producing. To provide. As a result, comparisons between fund companies are simplified, returns are presented uniformly, and they are real (real).
A clear understanding of the fees charged by investment trusts is an important factor in making informed investment decisions. Administrative fees are often used interchangeably with MER by business publications and financial professionals, but the two are not the same.
MER includes many fees, one of which is the administration fee. As a result, the MER is often higher than the administration fee.
The MER may be lower than the management fee. This situation is rare, but it occurs when the investment trust company bears the cost, such as when the fund is new and has few assets. Some of the operating costs are fixed costs, so if the fund is started and has few assets, these fixed costs will be high. Therefore, the fund company absorbs some costs and shows the MER at the level expected when more assets are collected in the fund.
Another situation in which fund companies absorb costs is during market anomalies such as the extremely low interest rate environment in 2010. During this time, money market funds saw costs that exceeded returns, and fund companies absorbed some costs. Since unusual things can happen each year, a review of the management cost ratio and management fees over the years should give you a complete picture of the typical costs of a fund indirectly incurred by investors.