The word investment does mean that there is a risk involved. Quite a lot of people do not invest too much in a single position. In a way they manage risk by just not taking it in the first place.
Since the fund company had to pay the advisor the commission what they do is increase the MER of the fund by about 0.5% compared to Class A units. This means your return will be 0.5% lower each year compared to if you had bought the Class A fund. When you buy this type of fund you are also locked in for a period of seven years (time frame could vary). If you sell prior to this you have to pay a penalty to the fund company allowing them to recoup the commission they paid to the advisor. Between the locked in period and the higher MER this option is clearly not in the client’s best interest.
There are various schemes and your manager can suggest you the paramount option according to your requirement. You can start off with a very small amount which can be directly debited from your bank account on a monthly basis. You can enter this sector with a low investment and can grow steadily. Fund managers keep a track of mutual fund NAV and accordingly suggest when to sell it off. Company that maintain records are trustworthy and you can be assured that your money is safe.
Then I remember how much money the mutual fund companies and investment advisors make off actively managed funds and it all makes sense. Of course mutual fund companies and advisors do not want to admit actively managed funds may not be the best option for investors, because they will earn less money if everyone starts using index funds. All of the data clearly shows that very few actively managed funds beat the index. The longer the time frame you look at the more the data points to index investing being the superior option.
It is easy to figure out why actively managed investments consistently under-perform with the incredible high Management Expense Ratio (MER) that is charged on actively managed mutual funds in Canada. Having a 2%+ MER compared to an index funds MER of 0.75% or less is a lot to overcome. Overcoming these higher fees becomes an even more difficult task when you look at the holdings of a typical equity fund compared to its index. In most cases the holding are very similar.
There is a maximum commission the advisor is allowed to charge, set by the fund company, but there is no minimum. It is possible for your advisor to sell you this type of fund and not charge you a commission at all. If you pay a commission this money goes to your financial advisor and the firm they work for. In addition to this commission your financial advisor will collect a trailer fee directly from the mutual fund company as long as you own the mutual fund. These trailer fees are normally about 1% and are paid from the MER of the fund.
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