There are many options for buying a group of securities in one product. The most popular ones are mutual funds, segregated funds and exchange traded funds. What they have in common is that these products are an easy way to buy a group of securities at once instead of buying each security individually. The fund can also proportion the securities so that you the individual investor does not have to. There are two main classifications for what type of fund you can purchase in terms of costs. It is important to know how these costs work so you can avoid paying too much for this convenience. These products differ in terms of how they are administered, access to the products and their costs.Active Versus Passive InvestingBefore getting into which of the products are suitable for you, there are some aspects that need to be considered so that you understand what the variations are among the products.Active investing is when someone (a portfolio manager) picks the stocks that are in the fund and decides how much of each one to hold (the weighting). This portfolio manager would also monitor the portfolio and decide when a security should be sold off, added to or have its weighting decreased. Since there is ongoing research, meetings and analysis that must be done to build and monitor this portfolio, this fund manager would have research analysts and administrative personnel to help run the fund.Passive investing has the same setup as active investing, but rather than someone deciding what securities to buy or how much of each one to buy, the portfolio manager would copy a benchmark. A benchmark is a collection of securities which the fund is compared against to see how well it is doing. Since everything in investing is about how much money you can make and how much risk it takes to make that money, every fund out there is trying to compare to all of the other funds of the same type to see who can make the most money. The basis for the comparisons is the benchmark, which can also become comparing between peers or funds managed the same way. Comparisons are general in done only for returns. The risk aspect of the equation is handled by looking at what type of securities the fund holds or how specialized the fund is.How Do I Know By the Fund Name If it is Active or Passive?The short answer is that you have to get to know how the fund manager operates the fund. Some clues to know more quickly if the fund is active or passive are given next. If they are intentionally trying to pick securities according to some beliefs that they have about the market, this is active management. If the fund description talks about “beating the benchmark” or “manager skill” then it is actively managed. Looking at the return history, if the returns vary versus the index by different amounts each year, then the fund is actively managed. Lastly, the fees may be expensive and have sales loads.If the name of the fund says “Index” or “Index fund” there is a good chance that the fund is passively managed. If the name of the fund says “ETF” or “Exchange Traded Fund” this could be a passive fund, but you need to make sure of this because some ETFs are actually active funds, but they are managed in a certain way. Most of the passively managed ETFs are provided by BMO, iShares, Claymore, Vanguard and Horizons in Canada and Powershares, Vanguard and SPDR (or Standard and Poors) and others if the holdings are from the U.S. Most of the other companies would have actively managed funds only. If the fund description states that the fund is trying to “imitate” the performance of an index or benchmark, then this implies that it is copying the index and this is passively managed. From the return perspective, passively managed funds will be very close to the index that they claim to imitate, but slightly less due to fees each year. The amount that the returns are under the index will be close to identical each year unless there are currency conversions or variances in cost which may come from currency fluctuations or hedging that the fund may do. Passive funds typically do not have sales loads as they are geared toward people who invest for themselves.There are some funds that try to mix active and passive management. These products can be assumed to be actively managed, although their results will be closer to the benchmark than most of the other funds, so this is something to consider if the variation from the index is a factor.Types of CostsWhatever product you buy, there will be a cost associated with buying it, keeping it and selling it. This will be true whether you have an advisor versus doing it yourself, and whichever institution you go to. Even buying your own individual stocks will have trading fees which you must account for. How much you are paying for each product as well as the advice will make a large difference in what return you will receive at the end of the day.There are many types of costs to be aware of when you are deciding which products to invest in. This article will focus on the active funds that make up most of the selection for retail investors.The Management Expense Ratio (MER)This is the largest cost for most funds and represents the cost of managing the fund. “Managing the fund” means running the investment company, researching the investments, advertising, overhead and the cost for the advisor or sales person when it applies. Administrative costs like GST within the fund and accounting for trades and record keeping are also part of the expense. The MER covers all of these costs in an actively managed fund. The MER is given as a percentage, which is the percentage of the assets that the fund manages or invests over a year of time. If you have $100,000 invest in a fund, and the MER is 2% per year, you are paying $2000 per year to keep this fund. The cost is subtracted from the return and what you see in your investment statement is your return net of fees, or after fees. There are exceptions to this rule if you have a high net worth account or a special arrangement with the fund company, but for the typical investor, this would be true. The Management Expense Ratio is the management fee plus the administrative costs. The administrative costs are usually between 0.05% and 0.1% of the assets of the fund. If the information you obtain states a “Management Fee” instead of a “Management Expense Ratio” you would have to add on the administrative costs to get the true fee. Seek out the prospectus and look up fund operating costs to find exactly how much the number is. In some cases, an advisory fee is also added to the management fee and administrative fee which can be substantial. If your advisor does not disclose this, the prospectus is the next best place to find out what the costs are.For American funds, the MER would be called the “Expense Ratio” or “ER” which is the same thing as the Canadian MER, but advisory fees are not included in the ER and would be included in Canada for the MER if the product is actively managed. If the product is passively managed in Canada or the U.S., the same names apply, but no advice would be part of the cost since these products are used by people who invest for themselves and would pay for advice separately if they retain it.MER Will Depend on ClassThere are products that have various classes of the same product, the same way there are different models of the same car or the same cell phone. For investment products, the classes indicate how you came across the product, or what restrictions you have on access to the product. For example, Class A is usually a retail class where anyone can buy the product with any amount of money. There is Class I, which can be obtained through an employer or another institution. An example might be buying this product through your company pension plan. There is a Class O which typically has no fees embedded in the return and is reserved for non-profit institutions of high net worth clients that buy direct from the company. There are also classes that are part of different portfolios that are set up by the issuer, like Class F which would be available depending on who your investment dealer is. There are also classes that vary depending on what type of advisor you have and what relationship they have with the fund company. The best thing to do here is ask what class you are being offered and get material form the issuer on how much it would cost. In some cases, you can get the same product in a different class and pay less for it. Some companies may have “Series” instead of classes or some variation thereof. The key thing to note is that different versions of the same fund would different fees, and the differences can be substantial.Sales LoadsWhenever you see the word “load” on a fund it refers to a sales load. This fee is paid to a sales person for advising you and recommending the product to you for the company. There are “front end loads” which are paid as a percentage of the amount you initially invest. If a front end load is 4% and you invest $100,000, you will pay $4,000 up front just to buy this fund. These funds may have the code “FE” in the fund name on your statement. Note that sales loads are not related to MER fees – they are separate fees. There is also a “back end load” or “Rear end load” which is a percentage charged to you when you sell the fund. These are marked with the code “DSC” or “Deferred Sales Charge”. If a back end load is 5%, and you sell $120,000 worth of this fund, you would pay $6,000 in fees to exit the fund. These funds tend to have a DSC redemption schedule which means the sales load will decrease the longer you stay in the fund. Most companies stop charging the rear end sales load after 6 years of holding the product. Since each company varies, you should obtain the details of this schedule up front and understand how the numbers apply to your holdings. There are also “no load” funds which do not charge sales loads at any time. You may also come across “Low Load Funds” and “Level Load Funds”. Low load is similar to the fees discussed above, but they are discounted or lower than average. The level load idea means that the same percentage of sales load is charged over time.Some companies charge an early redemption fee if you sell their fund within a short period of time. How short the period is will depend on the institution. In some cases, it is 30 days, but it can be 90 days, 6 months, 1 year or some other time period. This fee is designed to discourage quick redemptions or short term trading of the product.The best thing to do to clarify which load you have is to ask up front and have it explained to you. If the information is not forthcoming, it may be time to find another place to invest your money or do the research on your own. Note that sales loads only apply to a fund that is sold through a sales person. You may be able to get the same fund without the sales person in some cases. Passive investing generally does not have sales loads – but the exception would be if an advisor recommends these funds and charges you some type of referral fee. This would be another question to ask if you are being advised to buy a passive fund and are not seeing any direct cost to buying the product.Currency Hedging CostsThis type of fee will occur in funds that trade in non-Canadian currencies and hedge them so that the price you receive would be in Canadian dollars. The cost of transacting the hedge itself is the fee being described here, and it can range from 0.5% to 1% per year. If the fee is not disclosed, assuming 0.5% is the cheapest that it will likely be. If you are investing in emerging market currencies or non-developed market currencies, the hedges are much more expensive to put in place and go higher than 1% per year. This is a cost embedded in the return of the fund, but should be examined to flesh out exactly what you are paying to have this hedged. Both active and passive funds pay the same fee for this type of activity.The alternative would be to keep the securities in their home currencies and whatever changes happen to the foreign exchange rates would be reflected in the price of the product. The fact that currency exchange rates can change is a risk of your investment, but it is not considered a fee like the other fees discussed in this article. This fee does not apply if the fund price is in your home currency. You may have a U.S. dollar account, buy a fund that trades in U.S. dollars and then redeem this fund for U.S. dollars. Until you convert the money on your own to Canadian dollars, there is no currency charge. You would only have a conversion charge to change the final dollar amount to Canadian dollars.Referral Fees or Trailer ChargesThese can sometimes be called Service Fees. This type of charge is paid to a third party who sells the product to you on their behalf. It can be thought of as a referral fee or trailer fee. This fee tends to be captured by the MER, but this should be investigated with the company you are dealing with as this may vary. This type of fee tends to arise with active management as passive management products usually do not have any referrals attached to them.Performance FeeThis fee is based on whether a fund achieves a return over a required benchmark – a reward for good performance. This type of fee is common with hedge funds or exotic types of products, but it is sometimes embedded in funds sold to retail investors. Like with most of the fees, ask questions and do your research because this type of fee will be different for every institution and product. This fee is optional in that it usually will not apply if the return on the fund is negative or positive but not that high, but the question should still be asked to minimize surprises.Fees of Holding One Fund Inside of Another oneIf a fund that you are investing in has other funds within it as part of its holding list, then you will pay the MER fee for the fund you are buying as well as the fund that the fund holds. The best way to check if this is happening is to look at the holdings list. If a fund holds another fund, it will be a large holding so a fact sheet with a top 10 holdings summary should provide good information. The actual numbers for each of these items will differ depending on specifically what the fund is and how it is managed. Some of the other fees like Sales Loads and Referral Fees would not apply to a fund held inside of another fund. If the fee is necessary to operate the fund, like currency hedging, then this would be included. Whether a fund holds stocks or another fund can also impact withholding taxes if the fund is investing outside of Canada – particularly for U.S. products. This topic can get complex, so it will not be discussed here. Some funds will have other funds to get access to illiquid markets, or parts of the world that have hundreds of securities. Buying a fund in these cases would actually save on time and trading costs, so it can be justified depending on the market being invested in.Intangible CostsThe key takeway is that you need to do a cradle to grave analysis of what you have and see the costs from beginning to end of your investment period to get an idea of what is really happening. Ideally, the costs should factor in time spent, effort spent on research, and costs of discipline and assurance which would be available when dealing with an advisor that may not be there when you are doing it yourself.Where to Find These Costs?The most comprehensive place that will contain the most detail regarding fund costs is the prospectus. This can be found be searching for the product name and the word “prospectus”. If you do not know the exact product name, you can search the internet by the company name only, find their web site and then search for the product name there. The fund companies will have these documents with the regulator as well as their own web sites and they will be typically in PDF format which can be read and downloaded from your computer. A simplified prospectus would also have the same data that you would be looking for regarding fees.

What does High Yield Really Mean?High yield investing has taken on a totally new dimension since the introduction of the internet and the basic personal computer. In the United States, a high yield account is considered to be anything over 5% monthly. Of curse as the old adage goes, the higher the yield the larger the risk. This is true. You can not expect to earn more than an average percentage rate with less risk. It just doesn’t make sense.When discussing high yield interest accounts, are we talking about a savings account that produces a 5.4% annual percentage return? Well, yes. And no. It depends on who you are and what you consider to be possibilities and realistic.By now most of us have heard about investment programs that claim to be able to produce ridiculously high returns. Traditional investors cringes when they hear terms like 25% per month for one year plus the return of principle, and they nearly quiver when they hear claims of 300% in eight weeks. Certainly these high yield investment programs must be scams. How can it be possible to produce such returns in such a short amount of time? And why isn’t everyone out there doing this if it can really happen? If these high yield investments hold any water then in just five short years we could wipe out poverty and homelessness and no child would ever go to bed hungry or sick again!Are High Yield Investments Scams?Believe it or not this question is not a simple yes or no response. It can’t be. The short and safe answer would be yes, they are scams. However, it is important to understand what they are and why they have not all been shut down by the government if they are nothing more than a way to steal your money.High yield investment programs are not a place to try to earn an income. They are extremely volatile and unpredictable. People can and do make money from them, and sometimes it’s a significant amount of money. But don’t get excited and start rushing out to re-mortgage your house just yet.Read every single disclaimer on a high yield investment program website and they will all say the exact same thing. High yield investing comes with the risk of losing money. Never invest more than you can stand to lose. Why? Because every high yield investment program will eventually crumble and those with money invested are going to lose.High yield investment programs are based on principles similar to gambling. While most of do not, there are people in the world who make their living traveling around to casinos and gambling. Is it a scam? No. In fact most of us at least respect the fact that the individual is competent enough at playing casino games that they can earn a living at it regardless of how we feel about gambling ourselves. The same applies to earning a living from high yield investment programs. Most investors do not even consider them real investments and scoff at those who attempt to earn a living through high yield investing.Most people who are able to fund their lifestyle and earn a living through high yield investment programs started in using one of two methods. They either jumped in with both feet at the first program that sounded good to them and lost everything they invested or they researched high yield investment programs until their fingers went numb before ever investing a dime. Either way, both parties came to the conclusion that to come out ahead in high yield investments programs they would have to do ample research and completely understand the system and principles before they were going to succeed.Earning a living through high yield investment programs takes a system that is easy to implement and follow to prevent early closing and hefty losses. This system takes a lot of due diligence and of course, some very specialized knowledge about forex trading and even gambling.Reading the website’s method of investment can tell the average high yield investor a lot about the security, or lack thereof, for any particular program. Most will admit to trading in forex, which any average investor can do with a little knowledge and research. Some will tell you that they are trading in commodities as well and some admit that they are also gambling with the investors’ money, literally. Any website that says they are gambling using fool proof methods of winning should absolutely be avoided at all costs. There is no fool proof method of gambling.High yield investing is probably something to be avoided altogether, although that is an individual choice only an individual investor can make. However, if you choose to get involved with a high yield investment program and you loose your money, that was your choice as well. Just like it is possible to loose money in the stock market, you are likely to loose money in high yield investments. An investor that looses money in the stock market doesn’t typically file a lawsuit against the broker, so why are people so quick to file lawsuits and complaints when they loose money in high yield investment programs?The answer is unpleasant but for the most part it is true. Greed. We can accept that there are poor investments out there and should we loose three or four thousand dollars in a bad investment we accept it as part of the potential outcome of investing. Yet because we got excited and our minds started spending the money we were hoping to see through a high yield investment now suddenly the people who run these programs are thieves. High yield investments are investments even if they do border on scams and you run the risk of losing your money. Remember the basic principle of any investment? The higher the return the more likely you are to lose your money.High yield investments are incredibly risky and some of them are actually scams. Scam artists are everywhere and if there are people in the world who are willing to fork over thousands of dollars in the unrealistic hope that they can turn it into ten of thousands of dollars in a relatively short period of time then there will be people who are willing to steal that money from potential investors.People are willing to donate their money to any valuable cause, so there are people who are willing to set up phony charities to steal donations from giving people. That certainly doesn’t make every charity a scam and people aren’t going to stop donating to charities of their choice. Just as there are individuals who will take advantage of people’s kindness and desire to give to charities, there are individuals who are interested in scamming money from people who are trying to improve their financial portfolio through high yield investment programs. That doesn’t mean every single high yield investment program is a scam.The one thing all high yield investment programs do have in common is that sooner or later they will all fold, even those that start out being profitable. Just because a high yield investment program starts off producing the returns that it proposed in the beginning doesn’t mean that it will continue to do so over a long period of time. This is how the high yield investor gets dramatically burned. One or two programs that delivers for a period of time doesn’t mean it’s time to quit the job and devote all the available resources to high yield investing. It means that one or two programs are doing well. They will not do well forever and sooner or later they will crumble. That is the nature of high yield investing.High Yield versus Conservative InvestingWhich investment strategy is right for you? Only an individual investor can answer that question for their own interests. Some people can tolerate the significant risk factors while others prefer the stability of the more conservative and conventional methods of investing. Some people are more willing to take a gamble than others, and by all means high yield investing is a form of gambling.There are dramatically fewer scams in conventional investing. Some people will always believe that high yield investing is a scam and there is nothing that will convince them otherwise. Just because some people are able to be successful doesn’t mean that a program is not a scam. And just because something is a scam doesn’t mean that some money can’t be made anyway. Does it make it right or real or worthwhile? Again this is something that each individual investor needs to determine for themselves.For solid investment advice and a clearer path to investment success, independent advice and research is the best way to go. For all kinds of independent investment advice, stop by onlinetradingideas for comprehensive investment strategies, advice, and independent research. This site is particularly useful for making the most from conventional trading ideas and profiting from forex trades without having to enter the realm of high yield investment programs.

Social investing has received a lot of interest in recent years – especially following the financial crisis. Most people, however, are left wondering: What is social investing? Let’s answer this question.To understand what social investing is, we must first consider how traditional investors look at the world. In traditional investing, investors weigh investment decisions by looking at two broad factors – risk and financial return.Risk, Return – and Social ImpactEach investor has a certain comfort level across the risk-return spectrum, and he or she does their investing within that band of the spectrum. An investor might be comfortable giving up some of their return if an investment is safer. On the other hand, the same investor might be willing take a little more risk with an investment if it translates into a higher return.In social investing, a third factor is thrown into consideration – social impact. Social impact means that the enterprise supported by the investment yields some benefit to society beyond the income it generates for investors. Conversely, an enterprise can also have some negative impact on society, and a social investor will also take this into consideration when making investments.Just as traditional investors are willing to make a trade off between risk and return, social investors are willing to make a trade off between risk, return and social impact. If an enterprise is doing something that’s improving the environment, for example, a social investor may be willing to give up some financial return or assume greater risk on that investment depending on his or her individual comfort level.In short, social investing can be defined as considering the social impact of an enterprise when making investment decisions. By this standard, a number of investment approaches fall under the umbrella of social investing: mission investing, responsible investing, double-bottom-line investing, triple-bottom-line investing, ethical investing, sustainable investing and green investing.Social ScreeningWithin the universe of social investing, there are two broad categories: social screening and impact investing. In the social screening methodology, an investor comes up with a list of social standards that he or she wants his or her investments to meet.The investor eliminates any company that does not meet these standards and then invests in the “socially responsible” companies that do meet the standards in a way that meets the investors risk and return objectives.A number of socially responsible mutual funds have emerged that use such an approach. They adopt a social screening methodology, define a large basket of investments that adhere to those standards and then have their management company invest within that basket to meet the financial objectives of the mutual fund.Impact InvestingThe second broad category of social investing is known as impact investing or, sometimes, community investing. In impact investing, rather than investing in companies that do no harm, investments are made in companies that do social good.Enterprises that fall under the impact investment heading perform services that have a charitable or social purpose but also have a business model that can generate income and support a financial investment. They straddle both the charity and business worlds.Impact investment enterprises might be structured as non-profit or for-profit companies but rarely do they take the form of the large public companies listed in the capital markets. As a result, making an impact investment is more difficult and usually takes the form of a private investment in the form of a note or loan.Impact Investment SectorsSo what exactly are these impact investment enterprises? To get a better sense, let’s look at some of the sectors that qualify as impact investments.Affordable housing is one sector familiar to most people. Most people support an organization like Habitat for Humanity by making donations, but a foundation, for example, might support them by providing a low interest loan to fund the organization’s projects.Microfinance is another impact investment sector. A microfinance institution makes small loans to entrepreneurial people in developing countries to give them the opportunity to start or grow their own business and lift themselves out of poverty. A microfinance institution works similar to a bank, so it is able to generate income and support investors.There are many other similar sectors that generate income and have a social mission at their core: fair trade, community development organizations, social enterprises, etc. In each sector, companies can often find investors who are willing to give up some financial return or take on a bit more risk because of the social impact that these organizations have.