Toronto Investments: Mutual Funds
Mutual funds: an easy way to invest
A mutual fund is a pool of money invested by many investors and managed by professionals. When you buy a mutual fund, you’re letting a professional portfolio manager do your work for you. Instead of you spending hours and hours researching the best stocks or bonds or whatever investments that interest you, you’re letting an expert do it.
Professional managers also have the discipline and experience that are so necessary for success. And in exchange for all this – their time and efforts and ongoing expertise – they earn a fee that is part of the expense of managing the fund.
Whatever your goals, you can achieve them with mutual funds.
There’s a mutual fund that’s right for every investor. From the inexperienced individual investor with a few thousand dollars to a gigantic employee pension fund with many millions, there’s a fund to suit their purpose. Mutual funds provide significant advantages to most investors. In fact, for many investors, mutual funds will be the key component in their portfolio. We know how important diversification and asset allocation are to every investor. A mutual fund offers you both with a fraction of the investment you’d need if you were acting on your own, to say nothing of the time and effort involved. Mutual funds allow you to participate in many asset classes, geographic areas, industry sectors and investment styles. Whatever kind of portfolio you want – from ultra conservative to ultra-aggressive – it can be created with mutual funds.
Here are just a few of the types of funds available:
- Balanced Funds
These funds offer a mixture of safety, income and capital appreciation. They hold fixed income securities for stability and income, and a wide variety of common stocks for diversification, dividend income and growth potential. Balanced funds let you participate in the growth that stocks can provide while earning income through bond holdings. At times they also hold a small amount of cash for liquidity.
- Equity Funds
The primary objective of an equity fund is capital growth, although dividends may contribute to the total return. They vary widely by their level of aggressiveness - the more aggressive the investment approach, the higher the risk and the greater potential for capital growth.
- Bond Funds
Income and safety of principal are the main objectives. However, you should be aware that their values can depend on interest rate movements and they will be subject to capital gains and losses.
- Dividend Funds
Their goal is to earn tax-advantaged income with some possibility of capital appreciation. These funds invest in Canadian preferred shares and high quality common shares that consistently pay dividends. The income from these funds qualifies for the dividend tax credit, providing an important tax advantage to investors.
- Mortgage Funds
Goals are income and safety. They’re not as risky as bond funds because mortgage terms are usually relatively short (five years or less) so their values will not be as sensitive to interest rate changes.
- Specialty Equity Funds
Some investors like to diversify into specific areas that they feel will outperform the overall markets, such as natural resources, real estate, science & technology, precious metals. Specialty funds invest in these markets or industries. And although they are subject to volatility, they may provide excellent opportunities for growth over the long term.
- International Funds
More and more investors are realizing that the best investment opportunities often lie outside of Canada. As a result, international funds are gaining in popularity.
With this kind of wide variety available you can enjoy a level of diversification – and risk reduction – that would require hundreds of thousands of dollars to achieve on your own. With mutual funds you can easily do it with just several thousand.
You can make money with mutual funds in two ways:
You can accumulate distributions – the earnings of the mutual fund. Mutual funds earn money through capital gains, dividend payments or interest income. These returns (when they are made – they are not guaranteed!) are distributed to investors on a regular basis. You can also choose to reinvest the distribution, increasing the number of mutual fund units you hold.
You can sell your units for more than you paid. As the value of the investments in the fund increase in value, fund units increase in value. You can earn a capital gain by selling your units for more than you paid.
- You get easy and convenient access to a broad range of investments in Canada and around the world.
- You achieve instant diversification because funds are made up of many individual investments. For example, one equity fund might hold 100 or more different stocks in its portfolio.
- You can achieve a level of diversification that would be impossible on your own, unless you have substantial dollars to invest.
- You can enjoy the benefits of a professional money manager looking after your investments, even if you don’t have a six-figure portfolio.
- Mutual funds are highly liquid investments so you can get your money out when you want it.
- If you believe that a particular industry sector is going to grow, i.e., oil and gas, precious metals, telecommunications, etc., you can invest in it without having to research and choose any individual stocks.
- Mutual funds are a way to enjoy the growth potential of equities while avoiding the generally higher risk of investing in individual equities
Like any investment, mutual funds have pros and cons. However, on the whole, mutual funds are an excellent type of investment for just about all investors.
They can be right for you even if you have limited experience, limited time or limited capital. They’re also perfect if you have years of experience, plenty of time and unlimited capital. In other words, whatever kind of investor you are, whatever your goals, you can find a solution through the more than 2,000 mutual funds that are available today in Canada.
You should keep in mind that we’ve only talked about traditional, actively managed mutual funds. There is another category of mutual funds – such as index funds and exchange traded funds – which are "passively managed" and that you may want to learn more about.
Contact Us for more information.