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Fund fact sheets can help you help yourself

Personal finance columns can do only so much for you.

They can point out faults and good practices in the financial industry, they can highlight the best ways to invest and they can try to promote financial literacy. But you, the investor, have a role to play, too.

The personal responsibility of investors to look after themselves is worth considering right now because of a new development in the mutual fund industry. Pushed by regulators, fund companies are starting to introduce a simplified three-page summary of key facts about each of their products.

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These Fund Fact sheets are easy to read, widely accessible on fund company websites (you can also call and request one by mail) and quite informative. Read them and you'll have a lot of the information you need to make informed comparisons among funds and ultimately select the best ones for you. If you have an adviser who recommends funds, Fund Facts is a way to read up on exactly what you're being advised to sink your investment dollars into.

For instance, have you heard about the latest critique of Canada's high level of mutual fund fees? In a recent study by the independent analysts at Morningstar, Canada was the only country to get an F grade on fees. My colleague David Milstead wrote about it last week. What can you do about fees as an investor?

Check Fund Facts, which have started to appear on the websites of Bank of Montreal, Royal Bank of Canada and Invesco Trimark mutual funds. On the second page of these documents, you'll find a "How much does it cost?" section that lists the cost of buying the fund and the costs of owning it.

Low fees are the one fund attribute that you can count on when looking to the future. Past returns are no indicator of future returns and genius fund managers can depart any time. Should you buy the cheapest fund available? Not necessarily. But neither should you be the sucker who buys funds without considering price. This is precisely the behaviour that has enabled our fund industry's F-level performance on fees.

Assessing Risk

The last time the stock markets crashed, a lot of investors were shocked at how much their portfolios fell. They didn't have a proper understanding of the risk levels in their investments, which is another area where Fund Facts can help.

There's a risk scale in which funds are rated on a five-point scale that runs between low to high risk. Okay, it's an over-simplistic picture. But reading the risk rating is still a lot better than not reading it, especially if you next go to the graph showing annual fund returns over the past 10 years. For equity funds, you'll want to stress test your funds by seeing how they did in 2008 and 2002, both bad years for stocks.

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Though they're slowly falling out of favour, deferred sales charges (DSC) are still a common source of investor anger at investment advisers. DSC funds cost nothing to buy, but investors face redemption fees if they sell in the six or so years after they buy. Fund Facts does a nice job of disclosing potential DSC fees. In one particular case, a redemption fee of 6 per cent is charged if you sell in the first year after you buy. Or, as Fund Facts shows, $60 on every $1,000 you sell.

Imagine if the stock market crashes again and you want to sell. That's the wrong move, but say you do. However much your fund value is down, add an additional loss of 6 per cent. Or, maybe you'll notice on Fund Facts that there's an initial sales charge alternative to the DSC with many funds. It ranges from zero to 5 per cent, and zero is not uncommon these days.

Commissions to Advisers

Did you know that buried in the cost of most mutual funds is an continuing commission paid by the fund company to your adviser and his or her firm as compensation for advice provided to you? Fund Facts highlights this payout, which is known in the fund world as a trailing commission.

These commissions are A-okay, as long you're receiving advice that goes beyond a list of mutual funds to buy. If Fund Facts reminds you to think about this, then it has done its job well.

Fund Facts represent an attempt by regulators to deal with the fact that investors aren't using the simplified prospectuses and management reports on fund performance that fund companies already make available.

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The details of buying mutual funds can't be made any clearer than they are in Fund Facts, so take some responsibility for your investments and read them. God loves investors who help themselves.


Five reasons to read the Fund Facts sheets that fund companies are starting to make available on their websites

Know your costs: There's information on how much it costs to buy and own a fund.

Know what you're paying for: Find out what portion of your fund fees are going to pay your investment adviser.

Know your risk level: Find out how your fund ranks on a scale ranging from low to high risk.

Know what you own: Check out the stocks and bonds your fund holds.

Know your fund's history: Check out how volatile the annual returns have been over the past 10 years.

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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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