Wednesday, November 21, 2007

Mutual Fund Corporation versus Mutual Fund Trust

A mutual fund trust and a mutual fund corporation - each of them is an investment portfolio managed on the behalf of many investors who pool their money together and give it to a mutual fund company. Mutual fund companies are offering the same mutual fund as both a trust and as a corporation. There is a tax advantage afforded by the mutual fund when setup as a mutual fund corporation. It allows investors to switch between funds of the same mutual fund company without triggering any capital gains.

The mutual fund company will actually set up a corporation and instead of issuing UNITS like with a mutual fund trust, they issue shares in the corporation. Each mutual fund that a mutual fund company operates within the mutual fund corporation has its own class of shares. A switch between funds (again, as long as the fund one is switching out of and into are both offered as mutual fund corporations) is an exchange of one class of shares in the corporation for another.

With a mutual fund corporation with different classes of shares (each representing a distinct mutual fund) the OVERALL corporation is its own taxable entity. So as long as switch is between "shares" (funds) within the SAME mutual fund corporation, one not trigger any capital gains!

Shares in mutual fund corporations carry additional expenses to set up and maintain these structures in the neighbourhood of around 30 basis points - in other words their MER's are higher by about 0.3% (give or take).

One way to easily spot whether a mutual fund is set up as a mutual fund trust versus a mutual fund corporation is in the name. A mutual fund corporation's funds will have the word CLASS at the end of the name. For example the Mackenzie Maxxum Dividend Class.

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