Tuesday, 1 March 2016

Do you have too many mutual funds in your RRSP?




Once in a while, co-workers or friends ask me about their personal financial situation.  In particular, their RRSP and investments.  They have heard me say over and over again "there has to be a better way".  They seem to think I have a golden conversation where after we part ways, they will be richer in money and heart.  Well I am more than happy to start the conversation off with, are you buying mutual funds at the bank?  The answer almost every single time is yes.  Right there, that is my golden egg idea.  Get out of mutual funds.  The problem is not everyone is happy to hear this, they have squirrelled away savings every year to their RRSP into their RRSP is at the bank level which means 95% of the time, their money is in mutual funds.  Switching out of mutual funds to either individual stocks or ETFs is my golden egg moment where I save the investor hundreds of thousands of dollars over X number of years. (read my post on mutual funds).  You see, no one likes to be told what they have been doing for 15 years is wrong.  I was in that boat and asked "there has to be a better way" and found out about MERs .But we won't go into that in this blog.  This blog will will focus on the RRSP bank mutual fund investor having too many funds.

Yes, there are people who will stay in mutual funds all their life.  So be it, it will happen.  But if I ask that person, how many mutual funds they have, the answer most times is "I don't know".  They usually get back to me in a few days and report that it is over 10 funds.  I am all for diversification but is owing 10 plus mutual funds really beneficial to you, the investor?

In my humble opinion, a DIY Index investor in Canada can get completely diversified with 4 mutual funds.  A Canadian Bond fund, A Canadian Index fund, A U.S. index fund, and an International fund. If anything happens in the markets, you will not be left behind.  To save even more, instead of mutual funds, the 4 types of funds can be purchased using ETFs, remember ETFs have a much lower fee than their mutual fund counterpart, usually with the exact same holdings.  A popular low cost option for ETFs are the TD e-Series line of mutual funds.  My 4 picks to absolutely remain diversified on the cheap are:


  • TD Canadian Bond Index - e (TDB909)
  • TD Canadian Index Fund - e (TDB900)
  • TD U.S. Index Fund - e (TDB902)
  • TD International Index Fund - e (TDB911)
It's ok to add 1 or 2 more funds to expose your holdings to say Oil and Gas, or Real Estate but the above 4 will cover everything happening in the world for Canadian investors.

Too much diversification

If you have too many funds, there will be over lap in your holdings.  How do you see this?  Check the top 10 holdings of your mutual funds.  You will see a lot of Banks, Telecos, Insurance companies in Canadian Mutual funds.  Why would I hold 3 different funds where the top holdings are all basically the same?

It might be ok to overlap with your workplace RRSP.  Most workplace RRSPs only offer mutual funds.  There is no way around that so over lap will have to happen there.

Bring in the financial advisor

I don't want to stereotype financial advisors but why is it that they area always recommending new funds?  They charge their commission on the funds they sell to their clients.  No one can predict the ups or downs of the market so why is the financial advisor more qualified to do this guess with your money.  

My golden egg - final thoughts

So there you have it,  my golden egg conversation.  Get out of mutual funds, you will save the MER (do the calculation and you will see) and diversify on the cheap.  Whatever happens with the market, be it up or down, you will not be paying the high mutual fund MER.