Mutual Funds in Canada: How They Work and What They Cost

What it is

A mutual fund pools money from many investors, and a professional manager decides what to buy with it — stocks, bonds, or a mix. You own units of the fund rather than the underlying investments directly. Think of it as hiring someone to manage investments for you, with the bill shared across thousands of investors.

How it works

1. You buy units through an advisor or bank. Unlike ETFs, you can’t buy most mutual funds on a stock exchange — you purchase through a licensed advisor, your bank branch, or a fund company’s platform.
2. Units are priced once per day (the net asset value, or NAV), after markets close. You don’t get intraday pricing like ETFs.
3. The manager buys and sells according to the fund’s mandate — equity funds hold stocks, bond funds hold bonds, balanced funds hold both.
4. You earn returns through growth in the unit price plus distributions the fund pays out.

What it’s used for

Mutual funds suit people who want a hands-off approach with a human manager — including many employer group retirement plans, which are often built on mutual funds. They’re also the default product bank branch advisors sell.

They are NOT ideal for fee-conscious investors who are comfortable with a small amount of self-direction — as the costs section below shows, the fees are the whole story with this product.

Who provides it in Canada

• Bank fund families: RBC, TD, BMO, CIBC, and Scotia each run their own mutual fund lineups, sold mainly through their branch advisors.
• Independent fund companies: Fidelity Canada, Mackenzie Investments, CI Global Asset Management, and others, sold through licensed advisors and some platforms.

Note the structural conflict every newcomer should know: a bank branch advisor typically sells their own bank’s funds. That’s legal, but it means you’re not getting a whole-market comparison.

What it costs

This is the most important section on this page.

• MER (management expense ratio): the annual fee, deducted from returns before you ever see them. Canadian equity mutual funds typically charge around 2% per year or more — among the highest mutual fund fees in the world, a fact Morningstar’s research has documented repeatedly.
• In dollars: a 2% MER on a $10,000 investment costs about $200 every year, versus about $20 for a broad index ETF at 0.20%. Over 30 years, that gap can cost you tens of thousands of dollars in lost compounding.
• What the MER includes: the manager’s fee, operating expenses, taxes — and trailer fees, a slice paid to the advisor or dealer who sold you the fund, every year you hold it. Ask your advisor plainly: “How are you compensated on this fund?”
• Deferred sales charges (DSCs): these used to lock investors in with penalties for selling early. They were banned in Canada effective June 2022. If anyone still mentions DSCs, that information is outdated.
• Always read the Fund Facts document before buying — it’s a short, standardized sheet every fund must provide, showing the MER, holdings, and risks.

Newcomer notes

• Newcomers very often encounter mutual funds first, because they’re what bank branch staff offer when you ask about “investing.” That’s fine — but you are allowed to ask about fees, compare alternatives, and say no.
• You don’t need deep Canadian roots to buy mutual funds — standard ID and SIN requirements apply.
• Mutual funds can be held inside a TFSA or RRSP, which shelters their growth from tax.
• If your employer’s group RRSP uses mutual funds, still check the MERs — group plans vary enormously in cost.

Risks / watch-outs

• Fees are the dominant risk. A 2% annual fee doesn’t sound dramatic; compounded over decades, it’s enormous. This single factor explains most of the performance gap between mutual funds and index funds.
• Most active managers underperform. Year after year, SPIVA scorecards show the majority of actively managed funds trailing simple index benchmarks over long periods. You’re paying premium fees for, on average, below-average results.
• Not CDIC-insured. Mutual funds carry market risk — the value of your units can fall, and no deposit insurance covers them.
• Advisor incentives. Because trailers reward selling and retaining, advice around mutual funds isn’t always neutral. Fee-only financial planners (who charge you directly instead of via commissions) are one alternative.

FAQ

What is an MER in plain English? The percentage of your investment the fund takes each year to run itself. A 2% MER means $20 of every $1,000 you have invested goes to fees annually — silently, whether the fund goes up or down.

Are mutual funds safe? They’re regulated and legitimate, but “safe” isn’t the word — their value moves with markets, and they’re not covered by CDIC deposit insurance. The bigger, quieter risk is the fee drag described above.

Why are Canadian mutual fund fees so high? A mix of history, distribution through expensive branch networks, and embedded trailer commissions. Regulators have pushed for fee transparency (CRM2 statements now show what you paid), and competition from low-cost ETFs is slowly pressuring fees down.

Can I hold mutual funds in a TFSA or RRSP? Yes — and you generally should hold investments inside registered accounts rather than taxable accounts, so growth is sheltered.

How do I get my money out? You redeem units with the fund company or advisor at that day’s NAV price. Watch for short-term trading fees on quick round-trips — check the fund facts.

Educational content only — not financial advice. Rules and promotions change; verify current details with the provider or CRA.