Mutual Funds 101

Mutual funds can be an excellent way to invest for your future. However, if you are new to investing or haven’t considered mutual funds in the past, they can be a bit overwhelming. After all, there are thousands of different mutual funds available in Canada!

Mutual funds are pooled investments that allow a large number of individual investors to purchase a piece of a fund, known as a unit. The money collected from all the investors is used by a professional fund manager to purchase and sell stocks, bonds or other types of securities in accordance with the mutual fund’s investment objectives and risk profile.

Often these funds have a specific purpose. For example,

• growth or equity funds invest primarily in stocks
• income or dividend funds invest primarily in bonds or dividend paying stocks
• money market funds invest in short-term debt securities, such as Treasury bills
• index funds reflect the performance of a particular market such as the TSX (the Toronto Stock Exchange)
• balanced funds are made up of a combinations of equities (stocks), bonds and money market investments
• socially responsible mutual funds focus on good corporate governance, as well as the social and environmental impacts of a company

How do I make money from mutual funds?

• you can earn dividends from stocks
• you can earn interest income from bonds
• you can earn capital gains if assets within the fund are sold at a profit
• It’s important to note that there are risks with mutual funds. The securities in the fund can go down in value, which means you may lose some or all of the money you invested. Dividends or interest payments may also change as market conditions change.

What are the benefits of mutual funds?

• They are diversified. By their nature, mutual funds have investments in several different assets. They allow you to invest in things that you otherwise may not be able to afford, such as pricey stocks.
• You can invest in mutual funds with as little as $500. From there, set up monthly deposits and watch your money grow.
• They are fairly liquid. While it makes sense to hold mutual funds for longer-term investing, it’s always possible to redeem your mutual funds at the current market value to access your cash.
• Mutual funds have the potential to earn higher returns than other more conservative investments, such as GICs.

How much do mutual funds cost?
Generally, most mutual funds incur three types of costs: a management fee, an administration fee and taxes – which combine and represent the Management Expense Ratio (MER). The MER is a good indicator of how efficiently the mutual fund is being managed.

What can I do with mutual funds?

• You can hold mutual funds as part of your RRSP (Registered Retirement Savings Account), your TFSA (Tax-free Savings Account), an RESP (Registered Education Savings Plan) or as part of an RDSP (Registered Disability Savings Plan).
• You can also hold mutual funds as non-registered investments.

How much risk is involved in mutual fund investing?
A mutual fund is made up of a variety of investments, which means every mutual fund carries a different level of risk. Decades of market experience tells us that the higher the risk level, the greater your potential for earning a good return. That said, it’s important to remember that your principal is not guaranteed when you invest in mutual funds, since your investment is subject to market fluctuations.

How can I invest in mutual funds?
Meet with a member of our Qtrade Advisor or Qtrade Asset Management Wealth and Investment team to discuss your personal financial situation and review your investing options, so that you can make an informed decision.

Mutual funds are an effective way to diversify your investment and reach your long-term goals. Whether you are planning for retirement, saving for school for your kids or just trying to save tax-free, mutual funds can help you make peace with your money.

*Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities.