Monday, February 18, 2013

Understanding How Much You Are Charged For Your Mutual Fund

This post is a continuation to my personal experience in getting a Sun Life Prosperity mutual fund. I tried to keep the title as general as possible because other investment firms also offer the same charge for their mutual funds. Although this may be the case, I am still referring to the investment that I have made with Sun Life.  

I have made an initial deposit several weeks ago and I am ready to subscribe to several units again. As I mentioned on my last post, the initial subscription for a mutual fund at Sun Life is 5,000PhP. If you make succeeding subscriptions, the minimum amount  is 1,000PhP.

I plan to subscribe monthly to do cost averaging and so I have decided to regularly subscribe 1,000 monthly within the next three or five years. One thing I that I should have taken into heart is how I will be charged  for my succeeding subscriptions which is also called the sales load. You see, every time you subscribe to a particular amount of units  for your mutual fund, you will be asked to pay for the sales load  which is a percentage  charge levied to the investor upon the purchase of units or shares. There are two types of sales load which are the Front and Back Loads. It is important that you understand the difference of the two  if you want to invest in mutual funds and make succeeding subscriptions. 

Below is a summary between the two types of sales load taken. The front sales load deducts the charge for every purchase that you make. This means that the money that you hand out to the teller will not be fully invested to buy the shares and the amount that will be deducted will depend on the amount that you have invested. For instance, if you invest in a particular amount, you will get a deduction. Different products have different charges so it is best to check with the prospectus of the fund. In any case, this is a great option for those who will prematurely withdraw their money before the stipulated contract ends.

You will be asked by the financial adviser  to choose the length of time that you plan to invest the money when making your initial investment. Different products have different duration but the general rule is that the riskier and more aggressive your investment is, the longer you need to invest your money in the company. This is to make the most out of your investment.  If you are a long-term investment, then the back end sales load is good for you because the deduction of the charges is deducted after redemption. The deduction diminishes every year until it becomes zero after the fifth year. Thus, if you invest your money more than five years without really touching it, you can enjoy more capital gains. However, should a situation arises wherein you need to withdraw your money after three years of investment, you have to pay for higher charges.

Honestly, I couldn’t quite grasp this idea at first even if the financial adviser gave a ten-minute lecture on this topic but I guess experience is a good teacher. After my first subscription, I opted for the front end sales load and ended up having my subscriptions deducted with more than I am willing to pay. After that, I made all of my succeeding purchases with the back end sales load to optimize my purchase shares provided that I let my money stay with the company for more than six years.

Hope this deepens your understanding further regarding how much you are charge for your investments.

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