A fund’s Management Expense Ratio (MER) is the percentage of the fund’s assets that goes up in smoke every year to pay its expenses. Whether its an exchange traded fund (ETF) or a mutual fund, all funds have a management expense ratio (MER). This is clearly indicated in each fund’s prospectus.

 

In practice, these are the costs (that you pay) charged by the fund administrators to manage it, in a broad sense of the word, as these costs can represent the portfolio managers’ pay as well as marketing, taxes, audits, etc. Rather than sending you a bill each year, fund administrators pay themselves directly from said fund. For example, if the fund in which you have invested has a management expense ratio of 3% and it earned a return of 7% this year, the value of your investment will have increased by 4% (7% – 3%= 4%).

 

Now, if the funds perform miserably and earn 1%, the value of your investment will decrease by 2% (1%-3%=-2%). When considering a fund, it is very important to know the MER, but you should also check the fund’s performance and whether or not the management expense is already deducted from it, as 3% over a long period can add up to a lot of money.

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