So, you invested in a mutual fund, thinking it was the smart, safe choice. But what if I told you there’s a good chance it’s quietly eating away at your wealth without you realizing it?
I used to work at a bank and as an investment wholesaler, dealing with mutual funds every day. I’ve seen the marketing tricks, things like convoluted fees, complicated reports, and just enough jargon to keep you confused.
By the end of this blog post, you’ll know the key signs that your mutual fund is holding you back and, more importantly, I’ll show you potentially better ways to grow and protect your wealth.
Sign #1: Your Mutual Fund Underperforms the Benchmark
Many investors assume that as long as their mutual fund is making money, they’re on the right track. But what if your fund is making far less than the overall market? If your investments are underperforming their benchmarks, you’re actually losing out on potential wealth—even if your balance is growing. Earning 10% in 1 year might sound good, but if the benchmark returned 20%, that doesn’t sound as good.
How to Check Performance
Every mutual fund should be compared against its relevant benchmark, like:
- The S&P/TSX Composite Index for Canadian equity funds
- The S&P 500 for U.S. equity funds
- The MSCI World Index for global funds
Scotiabank – Scotia Selected Balanced Growth Portfolio (Series A)
One of the easiest ways to evaluate the performance of a mutual fund is by checking Morningstar. Simply search your fund name on Google + “Morningstar,” and you’ll get a detailed breakdown of its historical returns, quartile rankings, and comparisons to its category and benchmark index. Let’s do an example here.
Looking at the Morningstar performance breakdown for Scotia Selected Balanced Growth Portfolio (Series A), it’s immediately clear that this fund has underperformed its benchmark over time.
Underperformance Despite Huge AUM
At first glance, the Growth of $10,000 chart tells the full story:
- Index Growth: $18,814
- Category Growth: $17,079
- Scotia Selected Balanced Growth Portfolio: $16,458
Despite its massive $4 billion AUM, this fund has not delivered strong returns for its investors. 
Consistently Poor Performance and Weak Returns
This fund has struggled against both its category peers and benchmark over multiple time frames:
- 2024: 4th quartile (bottom 25% of its category)
- 3-Year and 5-Year Rankings: 3rd quartile, signaling consistent underperformance
- 10-Year Ranking: 3rd quartile, proving that long-term investors have not been rewarded
Its trailing returns confirm this underperformance:
- 1-Year: 8.62% (Index: 11.42%, Category: 10.93%)
- 3-Year Annualized: 4.98% (Index: 7.06%, Category: 6.45%)
- 5-Year Annualized: 5.14% (Index: 6.60%)
- 10-Year Annualized: 4.60% (Index: 6.01%)
The longer you hold this fund, the worse it gets. Over a decade, it has trailed the index by 1.41% per year, which means an investor with $100,000 in this fund missed out on tens of thousands of dollars in potential gains—all while paying high fees for subpar results.
Even If You’re Making Money, You Might Be Losing It
A common investor mistake is focusing only on positive returns. But if your fund grew by 3% in a year and the market grew by 10%, you effectively lost 7% in missed gains.
Spiva: SPIVA® Canada Year-End 2024
The SPIVA (S&P Indices Versus Active) Canada Mid-Year 2024 report confirms that most actively managed funds in Canada underperform their benchmarks over time. The longer you hold onto an underperforming fund, the bigger the performance gap becomes.
- 66.7% of Canadian Equity funds underperformed their benchmark in just the first half of 2024.
- Over 10 years, that number jumps to a staggering 93.4%—meaning only 6.6% of actively managed Canadian equity funds actually beat their benchmark over a decade.
Sign #2: High Fees That Eat Away at Your Returns
Banks count on you not noticing fees because they make billions from them. Many mutual fund investors underestimate how much fees eat into their returns. Even if a fund performs well, excessive fees can cripple your long-term growth. A 2% annual fee might seem small, but over 30 years, it can reduce your final investment value by over 40%—costing you hundreds of thousands of dollars.
Example: The Hidden Cost of a 2% Fee
Let’s say you invest $100,000 in a fund that earns a 7% annual return:
- With no fees: After 30 years, your investment grows to $761,225.
- With a 2% annual fee: Your investment grows to only $432,194.
🚨 That’s a difference of nearly $330,000 lost to fees!
In other words, 2% in fees wiped out 43% of your potential gains.
Mutual Fund Fees That Destroy Wealth
- MER (Management Expense Ratio): Anything over around 1.6% for equity funds and 0.75% for bond funds is considered high. In contrast, most index ETFs charge only 0.05%–0.25%, meaning mutual fund fees can be 30x higher in fees
- Hidden Trailer Fees: Many mutual funds pay commissions (usually 1%) to advisors, incentivizing them to sell high-fee funds instead of what’s best for you. It’s important to understand all fees, which is why we are transparent here at blueprint about our all-in fees with our investment partners.
- High Trading Fees (Turnover Ratio): Some mutual funds frequently buy and sell stocks, incurring unnecessary trading costs that get passed on to you.
Red Flags in Fees
- Your Advisor Won’t Explain the Fees Clearly – If your advisor dodges questions or makes the fee structure sound confusing, they probably benefit from those fees.
- High Redemption Fees if You Leave – Some mutual funds penalize you for switching to a better investment.
- You Might Actually Own a Segregated Fund – Some insurance companies sell segregated funds that look and feel like mutual funds, but they come with higher fees (2.5%–4%) and insurance features most investors don’t need.
- How to tell:
✅ Held with an insurance company (Sun Life, Manulife, etc.)
✅ Includes “segregated” or “guaranteed” benefits
✅ Higher fees than mutual funds (often 2.5%+)
✅ Has a maturity period (e.g., 10 years)
- How to tell:
Sign #3: Your Fund is Too Risky and Keeps You Up at Night
Investing should help you build wealth and peace of mind, not leave you stressed and anxious. If market drops make you lose sleep, constantly check your portfolio, or panic about your financial future, .
Signs You Have Too Much Risk
- You feel stressed when markets decline. If a dip in the stock market causes you to worry, sell investments impulsively, or lose confidence in your financial plan, your portfolio may not align with your risk tolerance.
- You react emotionally to market news. Taking on too much risk can lead to panic selling, which locks in losses and prevents you from benefiting from market recoveries.
- You don’t fully understand what’s in your fund. Some mutual funds hold volatile assets or have complex strategies that aren’t transparent to investors. If you don’t know how risky your investments are, you could be in for an unpleasant surprise.
- Your investment timeline doesn’t match your fund’s risk. If you need access to your money in the next few years but hold high-risk equity funds, you may face large short-term losses that derail your financial goals.
One often-overlooked aspect of risk is what I call your “mental wealth.” Even if a risky investment performs well over time, it’s not worth it if it affects your ability to think clearly and stay the course.
How to Fix This
- Recalibrate your risk exposure. A balanced portfolio should reflect your financial goals, time horizon, and ability to handle volatility.
- Take an investor questionnaire. Free tools from firms like Vanguard can help you assess your risk tolerance and adjust your portfolio accordingly.
- Consider more stable investments. If your mutual fund is too aggressive, switching to a diversified ETF portfolio or a lower-volatility fund can help you sleep better at night.
Before we go on, understanding your risk tolerance is just one piece of the puzzle. If you’re not tracking your net worth yet, you could be missing out on key insights into your financial progress.
📩 Download my free Net Worth Tracker for Canadians—a simple way to stay on top of your finances and make better investment decisions. Get it now—link is here:
➡️ blueprintfinancial.ca/net-worth-tracker-canada-download/
Sign #4: Your Mutual Fund is a “Closet Indexer”
Closet indexing is one of the biggest rip-offs in the mutual fund industry. It happens when a mutual fund pretends to be actively managed but closely tracks an index while charging the high fees of an actively managed fund. Investors are led to believe they’re paying for expert decision-making, but in reality, they’re just paying more for the same thing they could get from a cheap ETF.
Example: TD Canadian Equity Fund – A Classic Closet Indexer
The TD Canadian Equity Fund is a $7.4 billion fund that markets itself as actively managed, but its performance and holdings closely track the S&P/TSX Composite Index—while charging an MER of 2.19%.
Why This Fund Falls Short
📉 Underperforms the Index – Over 10 years, this fund returned 6.87% annually, while the index returned 8.59%.
💰 Excessive Fees – The 2.19% MER significantly eats into returns, compared to a low-cost Canadian index ETF like XIC (0.06%).
📊 Low Active Share – With a 12% turnover rate, the fund isn’t making bold investment decisions—yet charges high fees.
How Much Are You Losing?
- Over 10 years, the fund trailed the index by 1.72% per year.
- An investor with $100,000 in this fund missed out on over $20,000 in potential gains, all while paying steep management fees.
This fund is a perfect example of closet indexing—charging for active management while delivering index-like returns.
Closet indexing is like paying for a 5-star chef, but getting a frozen TV dinner.
Canada Has a Poor Track Record With Closet Indexing
Shockingly, Canada is one of the worst offenders for closet indexing. According to research from Notre Dame, Nova School of Business, the University of Virginia, and the University of Texas, approximately 37% of assets in Canadian equity mutual funds are invested in closet indexers.
A Morningstar study also found that many actively managed mutual funds in Canada have low active share scores, meaning they barely deviate from their benchmarks.
How to Spot Closet Indexing
Closet indexers won’t admit they’re just expensive index funds, so here’s how to identify them:
✅ Compare the fund’s holdings to a benchmark ETF – If the stock allocations look nearly identical, you’re paying high fees for no added value. (I broke this down in my previous blog post: TFSA Wealth Killers, where I compared the RBC Equity Fund to VFV— Be sure to check it out if you haven’t already!)
✅ Look at long-term returns – If the fund’s performance moves in lockstep with an index but charges higher fees, it’s a rip-off.
✅ Check the turnover rate – A low turnover rate (under 20%) suggests the fund is barely trading, meaning it’s not making real active decisions—yet you’re paying high active management fees.
✅ Consider tracking error – If a fund’s returns closely match the index year after year, it’s likely a closet indexer in disguise.
Sign #5: Tax Inefficiencies That Cost You Thousands
Even if your mutual fund performs well, tax inefficiencies can silently drain your returns. Many investors unknowingly pay more tax than necessary because their mutual funds trigger avoidable tax consequences.
Tax Traps Hidden in Mutual Funds
- Distributions That Trigger Unnecessary Taxes – Many mutual funds distribute capital gains, dividends, and interest income. If you hold them in a taxable account, you might owe taxes even if you didn’t sell anything. This means that even if the fund lost money, you could still get hit with a tax bill.
- Holding High-Dividend Funds in a Taxable Account – Dividend-paying mutual funds can be tax inefficient outside of a TFSA or RRSP. While Canadian dividends receive a dividend tax credit, U.S. and international dividends are taxed at your full marginal rate—leading to unnecessary tax drag.
How to Reduce Taxes on Your Investments
- Use the right accounts. Keep dividend-heavy or income-generating funds in RRSPs or TFSAs, and use taxable accounts for tax-efficient ETFs or capital growth investments.
- Consider switching to ETFs. Many mutual funds distribute capital gains frequently, while broad-market ETFs can be more tax-efficient.
- Rebalance wisely. Selling funds can trigger capital gains tax, so be strategic about when and how you make changes.
Alternatives to Mutual Funds
If you’re holding high-fee, underperforming mutual funds, it’s time to explore better alternatives.
The Psychological Trap Keeping You Stuck
Many investors hold onto bad investments because of loyalty to their bank or advisor. They think:
- “I’ve been with this bank forever, they must be looking out for me.”
- “My advisor says this fund is great, so it must be.”
- “I don’t want to switch—it’s too much hassle.”
Reality check: Your financial future and your family’s well-being should always come first—not loyalty to a bank or advisor. If your investments aren’t serving you, it’s time to demand better returns, lower fees, and a transparent strategy that actually helps you build wealth.
Investment Options
If you want higher returns and lower fees, consider these alternatives:
✅ Switch from Fund A to Fund F if You’re Not Getting Real Advice – Fund A (the one your bank sold you) includes hidden advisor fees, meaning your “free advice” is actually paid for by high commissions baked into the fund. Fund F is a lower-cost version of the same fund without embedded advisor commissions. If your advisor isn’t providing real financial planning, consider switching to a low-cost ETF portfolio, robo-advisor, or fee-only financial planner who actually puts your interests first.
✅ ETFs – Much lower MERs (0.05% vs. 2%), better tax efficiency, and often outperform mutual funds.
✅ Low-Fee Mutual Funds – A few actively managed funds exist with reasonable MERs, but they’re rare in Canada.
✅ DIY Stock Investing – For those willing to manage their own portfolio, investing directly in individual stocks and ETFs can be a low-cost alternative.
✅ Robo-Advisors – Automated investment platforms like Wealthsimple provide diversified ETF portfolios at a fraction of the cost.
✅ Portfolio Managers – For those who want active management, working with professional portfolio managers can provide customized strategies with all-in fees ranging from 0.5%–1.4%, depending on your portfolio size.
Most mutual funds aren’t designed to build your wealth—they’re designed to benefit the big banks. That’s why so many Canadians end up stuck with underperforming investments, high fees, and a serious lack of transparency.
At Blueprint Financial, we believe you deserve better.
If you’re ready to take control of your money with smarter strategies, check out our financial planning services and see how we help Canadians grow their wealth with clarity and confidence.
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