Mutual funds have been a popular investment vehicle for a long time. There are currently over 5,000 mutual funds available in Canada and, according to the latest figures from The Investment Funds Institute of Canada, 33% of Canadian households are invested in them.
Mutual funds are offered in different series or classes, which are identified by a letter. Each is designed to provide different benefits for investors and/or different compensation arrangements for the advisers who sell the funds.
The alphabet soup of letters can be confusing. Although some fund companies may choose to use different letters for their funds, these are the most common:
Also known as Retail series, these funds are what most people buy from their bank or mutual fund company representative. There are minimal requirements to meet, and low purchase minimums. MERs for this series are higher than others and typically include commissions and trailing commissions to the advisers. They are available in either a no-load or front-end load sales option.
Series B and C
These funds are similar to the A-series, but come with a deferred sales charge (payable on withdrawal) that typically decreases to zero if investors hold their funds long enough.
Series D funds are specifically created for the self-directed investor who purchases them through a discount brokerage. Discount brokerages that sell these series generally receive a reduced trailing commission to reflect that the investor doesn’t receive any advice. There are no fees to switch to D-series from another series of the same fund.
These funds are available exclusively to TD clients investing in index mutual funds online. They offer MERs as low as .33%.
These funds are available to investors who have a fee-based account with a full-service investment dealer. Your fees are based on a percentage of the total assets the adviser manages for you, as well as investment advice and other services. The mutual fund companies don’t pay any commission to the adviser, so this keeps MERs lower than those for A-series.
You negotiate and pay your fees directly to the adviser.
These funds are designed for investors wishing to draw regular tax-efficient income from their non-registered investments.
Investors in this series receive a consistent monthly distribution that’s partially made up of a return of the original investment. Since they are receiving a return of their own capital, this portion of the distribution is not taxable and allows capital gains tax to be deferred until the funds are redeemed.
The Return of Capital (ROC) distributions lower the Adjusted Cost Base (ACB) of the investment so that either the capital gain will be larger, or the capital loss will be smaller on the eventual sale of the mutual fund.
ROC distributions increase your monthly cash flow without increasing your taxable income. As a result, eligibility for government programs like OAS, GIS, spousal tax credits and/or medical expense credits will not be affected.
This series is aimed at investors with a high net worth of more than $500,000 to invest. These investors usually have a fee-based account with their full-service investment adviser. These funds have higher investment minimums ($200,000 – $5,000,000) and lower management fees than other series.
Corporate class mutual funds
No letter designation here, these funds are structured as holding corporations that contain a complete family of funds. This results in beneficial tax advantages. The benefit is that the investor can switch between funds within this class without triggering capital gains or losses. They defer taxes until the funds are redeemed, although MERs may be higher.
Corporate class funds are good for people who have maximized their RRSPs and TFSAs and are looking for tax-effective investment opportunities in a non-registered account.
Final thoughts on mutual fund classes
Investors should work with their advisers to determine which series of a mutual fund is the most suitable for them. Often there will be a big difference in fees and other advantages if you get the best fund class for your situation. Lower management fees may result in your funds delivering slightly better returns versus other series of the same fund.
Do you have the right one for you?