Mutual Fund Organization and Structure

Mutual Fund Organization

• Mutual funds can be set up as a corporation or a trust, separate from the companies that manage them
• Investors in a mutual fund corporation are shareholders, while in a trust they are unit holders
• A Board of Directors governs a mutual fund corporation, elected by shareholders at the annual general meeting
• Trusts or trustees govern a mutual fund trust; unit holders do not typically appoint trustees

Mutual Fund Complex

• Shareholders or unitholders are at the top of the complex
• The Board of Directors or Trustees are next
• Next is the Mutual Fund Corporation or Mutual Fund Trust
• Below this are the Investment Fund Manager, Portfolio Manager, Custodian, Distributor, Transfer Agent, and Independent Review Committee

Mutual Fund Complex Roles

• Investment Fund Manager manages the fund's investments and day-to-day operations, considers investment objectives, and picks a portfolio manager
• Portfolio Manager makes fund investment decisions, including buying/selling securities and determining asset mix, guided by the fund’s objectives
• Custodian safeguards the fund's cash and securities, holds income until reinvested or distributed, and makes payments as directed by the investment fund management firm
• By law, custodial functions must be separate from the investment fund management company
• A custodian must be a Canadian chartered bank or a Canadian trust company with shareholder equity of at least $10 million, per NI 81-102
• Distributor is the sales and marketing arm of the mutual fund company, bringing assets to the fund through sales
• The distributor sells units to investors and sends redemption requests to the investment fund management company
• Transfer Agent maintains the register of unitholders and records all transfers of ownership, usually a trust company, and disclosed in the prospectus
• The Independent Review Committee oversees potential conflict of interest decisions involving the investment fund manager to enhance investor production. As required by NI 81-107

NAVPU

• NAVPU represents the price at which units are bought and sold
• Investment fund manager calculates NAVPU, usually daily
• To calculate NAVPU, the investment fund manager must assess the value of the fund's assets and liabilities, and the number of units outstanding
• NAVPU = (total assets - total liabilities) / number of units outstanding

Valuation Date and Settlement Date

• Valuation date is the calendar day after a purchase or redemption request is received
• For most funds, settlement date is the date when the transaction settles or clears, which is the trade date plus three business days
• For money market funds, settlement date is usually the next business day

Purchasing Mutual Funds

• Single lump-sum purchase is subject to a minimum purchase amount
• There are lower minimum purchase amount requirements for registered accounts
• Regular investment plans involves regular automatic purchases with minimum amounts varying from fund to fund

Dollar Cost Averaging

• Involves investing the same amount of money in the same mutual fund at regular intervals
• Encourages disciplined investing
• Can include direct withdrawals from a bank account
• Avoids market timing

Mutual Fund Redemptions

• Lump sum withdrawal involves a single withdrawal of any amount, subject to funds being available
• Ratio withdrawal plan is a SWP where investors receive cash flow based on a percentage of portfolio value, which is flexible
• Fixed-dollar withdrawal plan is a SWP where investors receive a fixed dollar amount at a specified interval, such as monthly

Series T Mutual Funds

• Used as an alternative to systematic withdrawal plans
• "T" stands for tax
• They pay a specified percentage of the fund's year-end NAVPU annually
• Investors can switch from one series to another

Important Costs

• Management fees and operating expenses are paid by the fund for professional portfolio management, research, marketing, accounting, record keeping, and legal advice
• Trailer fees are paid by the mutual fund to mutual fund dealers
• Loads (commissions) are paid by investors when they buy and sell mutual funds

Management Expense Ratio (MER)

• A standardized measure of a fund's management costs as a percentage of its average net asset value during the fiscal year
• MER includes management fees, trailer fees, operating expenses, interest charges, and taxes
• MER does not include commissions or brokerage fees

Commission-Based Models

• Front-end sales charge or front-end load is a percentage of the purchase amount payable by the investor at the time of purchase
• Deferred sales charge or back-end load is a percentage of the cost or market value of the units redeemed, payable at the time of redemption
• Low-load sales charges involve a DSC with a shorter fee redemption schedule and a lower starting amount
• No-load funds do not have commission or service fees, but may have optional fees or charges for specific services

Fee-Based Model

• The dealer is compensated by an overall fee paid directly by the client, expressed as an annual percentage of assets under administration
• Covers all services provided by the mutual fund dealer
• There are no additional commissions when the client purchases or redeems mutual fund units

Disclosure

• Dealers must disclose specific information before investors purchase mutual funds
• Canada has a comprehensive disclosure regime for mutual funds to evaluate suitability for an investor and the value of their interest

Disclosure Documents

• A Fund Facts document provides investors with important information to determine the appropriateness of a mutual fund purchase
• Simplified Prospectus must be filed and approved by provincial or territorial securities regulators before a security may be offered for sale
• Annual Information Form supplements the information in the simplified prospectus
• Financial statements must be filed on an interim and annual audited basis
• Management Reports of Fund Performance (MRFPs) must be filed annually

Client vs Nominee Accounts

• Client name means the client is the registered legal owner of the fund
• Nominee name or street name means the mutual fund dealer is the registered legal owner of the account and holds the mutual fund in trust for the actual owner

Registered vs Non-Registered Accounts

• Registered accounts are savings plans defined in the federal Income Tax Act with special tax status
• Non-registered accounts include cash and margin accounts
• They have no particular tax benefits
• There are no restrictions on deposits, withdrawals, or types of investments held in them

Registered Accounts

• Registered Education Savings Plan (RESP) is tax-sheltered with a maximum contribution of $50,000 per beneficiary and a maximum government grant of $7,200
• Contributions are not tax deductible
• Registered Disability Savings Plan (RDSP) is for financial security of individuals eligible for the disability tax credit, maximum contribution of $200,000
• Contributions are not tax-deductible

Tax-Free Savings Account (TFSA)

• Income is not taxed
• Maximum contribution limit is indexed to inflation
• Contributions are not tax-deductible
• Unused contribution can be carried forward