Author Topic: How does MER work?  (Read 3288 times)

Tim

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How does MER work?
« on: March 12, 2014, 06:27:03 AM »
I'm a newbie to DIY investing. I started reading the Couch Potato method and have decided I want to go into index investing.

Prior to this, I've been letting a financial adviser manage my investments. The last couple times I was there, I realized that I didn't have a fucking clue what the guy was doing/talking about. The plan is to switch things over before the next RRSP deadline.

But first, I have to learn. Can someone explain how MER works (explain like I'm five...)? Does the percentage come off the principle or the income?

bornOK

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Re: How does MER work?
« Reply #1 on: March 12, 2014, 08:49:37 AM »
MER is a percentage of your total investment in the fund on an annual basis. So a 2% MER for example on a $1M fund would cost you $20,0000/year. You would just feel the effect of it as a lower return.

Tim

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Re: How does MER work?
« Reply #2 on: March 12, 2014, 10:53:23 AM »
Wow, that's what I feared. Time to move my investments into something less costly.

Just out of curiosity, what would happen if my returns didn't cover the MER?

skyrefuge

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Re: How does MER work?
« Reply #3 on: March 12, 2014, 12:49:28 PM »
Just out of curiosity, what would happen if my returns didn't cover the MER?

The MER is never explicitly charged to you. Instead, it just continually makes the value of your mutual fund lower than what it would be if there were no expenses. In fact, if the mutual fund company didn't report the MER to you, you wouldn't even be aware that management is getting paid out of the fund; they don't send you a bill for it, or add a "MER charge" to your statement at the end of each year. The fund's value is just silently reduced, which is precisely why there are usually MER disclosure requirements for mutual funds.

It operates the same whether the underlying assets of the fund have a positive of negative return.  If you own a fund with an expense ratio of 1%, and the underlying assets return 10% over the year, you would personally see a 9% return. If the underlying assets return -10% over the year, you would personally see a -11% return.