Mutual Fun…ds – Part III

Throughout the series, I hope you picked up a thing or two about what mutual funds are and their advantages and disadvantages. What if I told you that there was a type of mutual fund that combined both the advantages and minimized the inherent disadvantages as well? Would you think I was pulling your leg?

Enter index mutual funds. Save the best for the last, right?

What are they?

As I mentioned before, there is a huge variety of mutual funds out there that you can purchase. The goal of index mutual funds is to essentially replicate the performance of a broad based market index, such as the S&P/TSX Composite Index (stocks traded on the Toronto Stock Exchange). You can purchase index mutual funds for a variety of different markets, including US markets, international markets, as well as bond markets.

Why buy index mutual funds?

Since they are still mutual funds, you still receive the benefits of diversification, cheaper transaction costs and relatively high liquidity. The key is the professional management aspect. You still have a fund manager handling your portfolio for you, but instead of buying and selling stocks that they BELIEVE will BEAT the market at the end of the year, their goal is instead to REPLICATE the market return. If most managers can’t beat the market year over year, why not just accept the market return year after year? As a result, the MERs of index mutual funds are much lower than the average MERs for mutual funds available in Canada. Lower costs = more money in your portfolio. Indexing for the WIN!

Now what?

That’s all fine and dandy. Lots of information. Information overload to some. But let’s say I’ve convinced you to consider index mutual funds. At the VERY least, convinced you to dig up your mutual fund statements and figure out how much you are paying each year (based on your MER). So how does one get started in this wonderful world of indexing?

Full disclosure: when I recommend products, I personally use the products before recommending them. I DO NOT personally own any TD e-series products, but I would highly recommend them as an alternative to any mutual funds recommended by financial/investment advisors. Remember, these people are going to recommend mutual funds that carry higher MERs and possibly additional sales charges to you. Why? Because their livelihood depends on it. How much money am I making on my recommendations? How much was that again? Oh, right, NOTHING! Except the satisfaction of knowing that you’re not getting ripped off.

Anyways, if you already have a mutual fund account with TD Bank, this should be a bit easier.  It is recommended that you actually open a TD Waterhouse Discount Brokerage Account, and from there, you have the option to purchase the e-series funds. With a brokerage account, you can purchase stocks and ETFs as well. When you are setting up your accounts, make sure you understand what the fees are associated with the accounts (ie, one free TFSA withdrawal a year etc.) and watch out for fees for paper billing. They will still try to get money from you in some shape or form.

Once your accounts are set up and funded, then what? How do you choose what to invest in? Determine your asset allocation and choose the corresponding funds. Since I am 30, I will have 30% in bonds.

30% Canadian bonds – TDB 909 (MER of 0.51% as of June 30, 2011)

24% Canadian equities – TDB 900 (MER of 0.33% as of June 30, 2011)

23% US equities – TDB 902 (MER of 0.35% as of June 30, 2011)

23% International equities – TDB 905 (MER of 0.53% as of June 30, 2011)

Assuming your portfolio allocation is IDENTICAL to your ideal asset allocation, your portfolios’ MER is approximately 0.435% a year. Compare this to the average mutual fund in Canada which boasts an average MER of 2.50%. You are saving yourself almost 2% every year! Add in the magic of compounding

Anyways, like I mentioned before, I personally have not gone through the exercise of purchasing TD e-series funds. If you have, please share your experience and any lessons learned. Any additional information will help!

What do you think? Do you now have a better idea of what mutual funds are? ETFs are coming up next!

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14 Comments (+add yours?)

  1. My Own Advisor
    Feb 04, 2012 @ 01:34:15

    I think TD e-series makes sense for many DIY investors. Good of you to mention them. That said, I don’t use them.

    Dividend-paying stocks and ETFs all the way!!!


    • Vicky Vo
      Feb 04, 2012 @ 03:39:29

      I think it makes sense for those who have low investment balances to start with the TD e-series as the trading cost for ETFs (cheapest I can find is $4.95/trade) will eat up a good % of their investments.

      My resolution this year is ETFs only, but I see some tasty dividend-paying stocks that would help give me an edge over you… 🙂


  2. Leigh
    Feb 06, 2012 @ 05:30:03

    I really enjoyed the series! That was an excellent primer on mutual funds 🙂

    I definitely prefer index funds over ETFs – they’re just so much more flexible. Why would I want to wait 3-5 *business* days for the transfer from my checking account to my money market account to clear and then 3 days for the funds to settle into the ETF when I could just buy shares of the index fund?


  3. The Dividend Ninja
    Feb 09, 2012 @ 22:50:25

    Vicky, Nice post!
    I actually have a small Couch Potato Portfolio (Ninja Potato) of nothing but TD e-series index funds. I then use the e-series funds elsewhere to keep my percentages in-line, cheaper than the trading fees etc. with ETFs when it comes time to rebalance. The MERs on these funds are very low!! 🙂

    Although I currently have my e-series funds in TD Waterhouse, it is actually better for the small investor not to go this route. You can hold TD E-series funds with TD at the bank level in either a RRSP, TFSA, or unregistered via their mutual funds account. Once setup you convert it to an e-series account.

    It’s a bit of a pain in the a*$, but with TD Waterhouse you will pay $25 to withdraw any amounts out of the TFSA but not with holding them at TD however. If you have a TD Waterhouse RRSP and you have less than 25K in assets then you’ll also get dinged the annual admin fee of $100. Holdign e-seires funds at the branch level just makes more sense, if you are only going to use the e-series funds in a specific portfolio.

    The Dividend Ninja


    • Vicky Vo
      Feb 10, 2012 @ 04:31:58

      Thanks Ninja!

      That’s good to know; I will definitely recommend holding e-series at the branch level for clients with smaller portfolios to avoid those admin fees. Thanks!


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  5. Ken
    Feb 11, 2012 @ 17:22:40

    Good post! The TD e-series funds are a simple and inexpensive solution that do not require an external brokerage set-up.

    That said, I tracked an e-series allocation such as you suggest against the Complete Couch Potato set-up. Though the CCP set up does require a brokerage account (rather than just a TD bank account) and does include a couple of more EFTs, it has performed better and I can’t really see any difference in risk – maybe even less.

    So, I would opt for your approach but use the Complete Couch Potato indexing portfolio over the TD at this point.


    • Vicky Vo
      Feb 12, 2012 @ 18:00:56

      I do like the Complete Couch Potato set-up! I definitely prefer ETFs over index mutual funds, but believe that the e-series funds are good for people in certain situations. For example, for those who are intimidated by the stock market and the thought of buying and selling may be too much for them. If they are going to default to buying mutual funds anyways, then the e-series is a better alternative. Also, for those who are just starting to invest and their balances are not high enough to purchase enough ETFs for a balanced portfolio. The trading fees will be a large percentage of the portfolio for these people as well. Although I do agree that the Couch Potato set-up is great, it may not be the best option for beginners or for those with smaller portfolios. 🙂

      Thanks for the great comment and dropping by!


  6. Trackback: Exchange Traded Funds (ETFs) – Part II « Vix's Money
  7. DIY Investor
    Feb 14, 2012 @ 23:53:15

    Good post! I like that you start with the asset allocation and explain yours. As you show it is not a complicated process and fees are extremely important. Nice bit on the 2% compounding!
    I use index ETFs which are commission free. I agree there are some compelling yield paying stocks out there as well.


    • Vicky Vo
      Feb 16, 2012 @ 18:29:51

      Which ETFs do you use that are commission free? I love anything free! 🙂 Do you hold any individual stocks as well?

      Thanks for dropping by!


  8. Trackback: Why invest in the first place? « Vix's Money
  9. Trackback: Exchange Traded Funds (ETFs) – Part II

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