Unloading a loaded mutual fund
October 25, 2005 12:03 PM Subscribe
FinancialFilter: Should I sell my DSC mutual funds now or later?
I have some mutual funds that have deferred sales charges. About half of them will be free of the 3% DSC at the end of 2006. The remainder expire in 2007 (those carry 4.5% blended rate DSC right now).
I've held these funds since 2000. They haven't gained at all since then, since some sustained enormous drops in the post-9/11, post-Nortel world, offsetting everything else. A CFA I know recently suggested I sell my funds and put them into ETF. I had been planning to put my funds into ETF when all the DSC expire. However, this guy (who has only a casual acquaintance and nothing to sell me) said that, if I sell and lose the DSC, I'll make it back on the ETF returns, since they have no MER (management expenses).
I know it was stupid to buy funds with DSC. But the financial planner who originally sold these funds was a close friend who convinced me these funds would provide higher returns than the no-load funds at my bank. He also provided incorrect information about when the DSCs would expire. I recognize all this as a mistake now, and so please don't feel a need to lecture me on my stupidity.
What I really need is to know whether I should sell now or wait till some or all of the DSC expires. It's not a small sum of money, so I'm not dickering over $25.
I have some mutual funds that have deferred sales charges. About half of them will be free of the 3% DSC at the end of 2006. The remainder expire in 2007 (those carry 4.5% blended rate DSC right now).
I've held these funds since 2000. They haven't gained at all since then, since some sustained enormous drops in the post-9/11, post-Nortel world, offsetting everything else. A CFA I know recently suggested I sell my funds and put them into ETF. I had been planning to put my funds into ETF when all the DSC expire. However, this guy (who has only a casual acquaintance and nothing to sell me) said that, if I sell and lose the DSC, I'll make it back on the ETF returns, since they have no MER (management expenses).
I know it was stupid to buy funds with DSC. But the financial planner who originally sold these funds was a close friend who convinced me these funds would provide higher returns than the no-load funds at my bank. He also provided incorrect information about when the DSCs would expire. I recognize all this as a mistake now, and so please don't feel a need to lecture me on my stupidity.
What I really need is to know whether I should sell now or wait till some or all of the DSC expires. It's not a small sum of money, so I'm not dickering over $25.
If you buy an ETF, you'll incur a transaction fee (it's just like a buying stock). You can probably minimize this fee if you have a cheap online brokerage account. This will probably not tilt the scales either way, but just wanted to point it out.
If you expect to experience similar returns with the DSC mutual fund or the ETF, I think it may make sense to hold on to the DSC funds. I assume the DSC funds have a relatively low annual fee due to the high DSC - if the fees are something less than 1.0%, I doubt the 70 - 90 basis point savings (I'm guessing an ETF's fee would be in the .1 - .3% range) earned by switching to an ETF would offset the cost you incur by paying the DSC.
posted by mullacc at 1:15 PM on October 25, 2005
If you expect to experience similar returns with the DSC mutual fund or the ETF, I think it may make sense to hold on to the DSC funds. I assume the DSC funds have a relatively low annual fee due to the high DSC - if the fees are something less than 1.0%, I doubt the 70 - 90 basis point savings (I'm guessing an ETF's fee would be in the .1 - .3% range) earned by switching to an ETF would offset the cost you incur by paying the DSC.
posted by mullacc at 1:15 PM on October 25, 2005
You didn't say what the expense ratio is on the fund, which will figure prominently into the decision.
The question can be more or less summarized by:
Is (Active Expense Ratio - Active Alpha - ETF Fee)*(Years until DSC expires) > current DSC?
In English: Is the cost incurred from sticking with the actively managed fund less whatever benefit comes from active management and the cost of passive/indexing, greater than the cost incurred from getting rid of the actively managed fund right now?
Assuming alpha is zero (you probably wouldn't be asking this if it were positive):
If (Active Expense Ratio - ETF fee)*(Years until DSC expires) > current DSC, then you would get rid of them today.
If (Active Expense Ratio - ETF fee)*(Years until DSC expires) < current DSC, then you would wait.
posted by milkrate at 1:35 PM on October 25, 2005
The question can be more or less summarized by:
Is (Active Expense Ratio - Active Alpha - ETF Fee)*(Years until DSC expires) > current DSC?
In English: Is the cost incurred from sticking with the actively managed fund less whatever benefit comes from active management and the cost of passive/indexing, greater than the cost incurred from getting rid of the actively managed fund right now?
Assuming alpha is zero (you probably wouldn't be asking this if it were positive):
If (Active Expense Ratio - ETF fee)*(Years until DSC expires) > current DSC, then you would get rid of them today.
If (Active Expense Ratio - ETF fee)*(Years until DSC expires) < current DSC, then you would wait.
posted by milkrate at 1:35 PM on October 25, 2005
Response by poster: No, it appears I have high MERs and high DSCs. I've got Templeton, AGF and AIC funds. I don't have all the numbers in front of me, but the Templeton funds have 2.4% and 2.98% MERs.
Also, my cheap online brokerage is offering me a deal where, if I move funds to them, I can get 10 free trades. So I could buy some ETFs for free, assuming I am not forgetting something. I've already transferred some of my funds to them, but I could probably use some of those free trades to sell some of these funds.
I have international stock, growth, aggressive growth, health sciences, American growth, etc. Not sure if this helps.
posted by acoutu at 5:18 PM on October 25, 2005
Also, my cheap online brokerage is offering me a deal where, if I move funds to them, I can get 10 free trades. So I could buy some ETFs for free, assuming I am not forgetting something. I've already transferred some of my funds to them, but I could probably use some of those free trades to sell some of these funds.
I have international stock, growth, aggressive growth, health sciences, American growth, etc. Not sure if this helps.
posted by acoutu at 5:18 PM on October 25, 2005
In general, I agree with milkrate, but here's another possible option:
Depending on the amount of money you're talking about, it may be worth looking for lower-MER funds from the same company. It is often possible to transfer from one fund to another without triggering the DSC.
Just make sure the fund company doesn't reset the DSC when you do it.
posted by RecalcitrantYouth at 6:05 PM on October 25, 2005
Depending on the amount of money you're talking about, it may be worth looking for lower-MER funds from the same company. It is often possible to transfer from one fund to another without triggering the DSC.
Just make sure the fund company doesn't reset the DSC when you do it.
posted by RecalcitrantYouth at 6:05 PM on October 25, 2005
Response by poster: Thanks. I took a look and it appears all the other funds have DSCs in the same 2.3-2.98% range.
posted by acoutu at 11:02 PM on October 25, 2005
posted by acoutu at 11:02 PM on October 25, 2005
The DSCs may be the same across a fund family, but the MERs vary dramatically - e.g. for Templeton - .05-3.83% - there may be something in there with a lower MER, but I don't know if you want a T-bill fund for .05% :-)
I got this from the http://www.globefund.com/ Fund Reports by family...
If your DSCs are all between 2.3% and 2.98%, and your MERs are about the same, then I believe milkrate's formula above says sell... (2.3% is about what you'll pay in MER over the next year)
I have international stock, growth, aggressive growth, health sciences, American growth, etc. Not sure if this helps.
Based on your list of funds, I'd encourage you to diversify more broadly, and don't get tempted with the "specialty ETFs"... It seems like your fund selections are both narrow and growth-focused.
See http://www.financialwebring.com/forum for some good discussion of DIY investing in a Canadian context -- you may wish to read the forums and repost your question there for a better answer.
There are other issues which you may need to take into account -- e.g. capital gains/losses in unregistered accounts.
posted by RecalcitrantYouth at 5:03 AM on October 26, 2005
I got this from the http://www.globefund.com/ Fund Reports by family...
If your DSCs are all between 2.3% and 2.98%, and your MERs are about the same, then I believe milkrate's formula above says sell... (2.3% is about what you'll pay in MER over the next year)
I have international stock, growth, aggressive growth, health sciences, American growth, etc. Not sure if this helps.
Based on your list of funds, I'd encourage you to diversify more broadly, and don't get tempted with the "specialty ETFs"... It seems like your fund selections are both narrow and growth-focused.
See http://www.financialwebring.com/forum for some good discussion of DIY investing in a Canadian context -- you may wish to read the forums and repost your question there for a better answer.
There are other issues which you may need to take into account -- e.g. capital gains/losses in unregistered accounts.
posted by RecalcitrantYouth at 5:03 AM on October 26, 2005
Response by poster: My funds sound narrow to me, too. I was very happy with my investments, until I followed the advice of my friend, a mutual funds sales guy who claimed to be a financial planner. I had a broad portfolio before, but he told me that these funds better fit my risk profile. But they seem fairly aggressive and narrow to me, whereas I'm more of a moderate investor. Going against my gut and believing that a friend who worked in the industry would know more was a huge mistake. So now I'm trying to put things back together. He had told me the DSCs would all expire in four years, but it turns out it's 6-8 years (8 because he didn't tell me that monthly purchases would have their own clocks).
I'll see about posting in financial webring. Thanks.
posted by acoutu at 12:33 PM on October 26, 2005
I'll see about posting in financial webring. Thanks.
posted by acoutu at 12:33 PM on October 26, 2005
This thread is closed to new comments.
What's the MER? I thought 2% or so was typical; I'd be surprised if it were as high as 4.5%.
If they're broadly based Canadian equity funds, and you're planning to move the money into something like the i60 or i60c, which have a similar risk profile, I'd be inclined to wait until the DSC either expires or drops to a low level (e.g. 1.5%).
If they're higher risk, I'd unload them now. I bought some emerging-market mutual funds a few years ago. They didn't do well, but I figured I might as well hold on until the DSC charges expired. Bad move; they dropped further. The next time I looked at my investments, I unloaded them, figuring that a 3% charge wasn't as bad as the risk that they'd drop another 10 or 20%.
[If you haven't already, I'd also suggest diversifying: keep some money in equities, some in fixed-income investments like GICs, some in cash. Interest rates may be low these days, but it's hard to tell whether the stock market is going to go up or down. If it goes down, your fixed-income investments will look better in comparison.]
posted by russilwvong at 12:24 PM on October 25, 2005