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New to investing? Take a close look at e-funds

One of the all-around best products offered by the Canadian mutual fund industry is also one of its most invisible.

The e-series of index funds offered by Toronto-Dominion Bank's fund arm are exceptionally cheap to own and usually among the better performers in their category. You pay nothing to buy or sell them, and they're widely accessible because they're sold online and available in amounts as little as $100.

TD's e-series ("e" for electronic) is an ideal choice for newcomers to investing who want to build a simple but sound portfolio steadily over time. Arguably, they're a better choice for some than exchange-traded funds, which are one of the hottest products in the investing world these days. E-series funds are also a better bet than the more expensive traditional index funds sold by all the big bank families, including TD, as well as Altamira.

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And yet, you're unlikely to see e-funds mentioned anywhere except on the rickety old website TD built for them years ago (tdcanadatrust.com/mutualfunds/tdeseriesfunds/index.jsp).

One explanation would be that TD wants people to buy its traditional actively managed funds, which generate more fee income for the bank. Regardless, TD continues to offer e-funds, and that's good news for investors who understand how low fees can boost investment returns.

There are 12 e-funds, including one each for the Canadian stock and bond markets, a few U.S. choices and options for international, European and Japanese markets. Management expense ratios (MERs) range from a low of 0.31 per cent for TD Canadian Index-e, to 0.5 per cent for TD International Index Currency Neutral-e. (The Canadian Index-e product's MER compares with roughly 2 per cent for large Canadian equity funds, and a category-wide average of 2.44 per cent.)

TD's e-funds are actually a special online version of more widely available index funds. You can only buy e-funds online through TD Asset Management or through the online broker TD Waterhouse. The value of e-funds is apparent not only through comparisons with other funds, but also with TD's own conventional index funds. The regular version of TD Canadian Index has an MER of 0.84 per cent, and its five-year compound average annual return is 5.74 per cent. With its cheaper MER, the e-version of the fund has a five-year return of 6.24 per cent. This is a near-perfect example of how paying less to own a fund can help you reap higher returns.

Most mutual funds require minimum upfront investments of $500 to $1,000, so the $100 minimum for TD's e-funds (and its other products, for that matter) is unique and ideally suited to someone just starting an investment portfolio.

Here's one way a twentysomething investor could set up a portfolio of e-funds: 55 per cent TD Canadian Index-e; 10 per cent TD U.S. Index Currency Neutral-e; 10 per cent TD International Index-e; and 25 per cent TD Canadian Bond Index-e.

These funds are ideal for gradual portfolio building because they're sold on a no-load basis, which means no cost to buy or sell. That's a major benefit over ETFs, which are even cheaper to own than e-funds but require brokerage commissions of $5 to $29 to buy and sell. You could set up a pre-authorized chequing plan to contribute $100 per month to e-funds at zero cost. ETFs would likely cost you as much as $348 for 12 monthly purchases (Note: the Claymore family of ETFs offers no-charge PAC plans for its products, but not all brokers are yet participating).

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Savvy investors know about TD e-funds. The Canadian Finance blog said earlier this year that they may be the simplest way for people to invest in a diversified, low-cost portfolio. The Canadian Capitalist blog wrote about e-funds a while back and generated a lively discussion that you can read at http://www.canadiancapitalist.com/investing-in-td-e-series-funds-for-your-resp/.

One proviso with the e-series is that it's kind of boring and glamour-free. Investors who appreciate low fees and consistently competitive returns won't mind a bit.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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