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Investing and the Individual Investor
 Fixed
Income
Stocks
Mutual
Funds
Mutual funds
Why Mutual Funds
Investments in Mutual Funds have grown rapidly. As the graph
indicates, Canadians are opting for mutual funds rather than
regular bank accounts and for good reason. The money is safe
and returns are much higher than what most deposit institutions
pay on money in savings or checking accounts. Mind you, any
fund manager can buy the wrong stock and markets do fluctuate
but with a balanced and long term investment approach the
money is safe and the chances of a reasonable return are good.
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Where to buy
Given the popularity of mutual funds it is not surprising
that they are available through most financial institutions.
This includes mutual fund companies, banks, trust companies,
credit unions and life insurance companies. Many offer their
own funds, which means that they have come up with the idea
for the fund, market it, and take care of its administration.
Some act only as Fund Distributors; the management of the
investments and even the administration may be left to others.
Regardless of the arrangement, securities regulations require
that your money and all the other assets of a fund be held
in a custodian bank or trust company separate from the assets
of the fund manager and or distributor. The regulation is
to make sure that your money is safe.
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Advantages of a mutual fund
Professional mangement: When you invest in a mutual
fund, you share the expense of having someone with qualifications
and a proven track record manage your money. Your share receives
the same attention, and gets the same returns, as the money
of all the other investors.
Easy way to invest: Most people buy their mutual funds
through a mutual fund sales person, stock broker, service
representative in a bank or credit union, life insurance sales
person or a financial planner. They'll answer your questions
and can be very helpful putting together a balanced portfolio
that fits your circumstances. Minimum deposits very by fund
but are usually not very high and deposits can be made through
automatic bank withdrawals if you wish.
Liquidity: It is easy to get at your money if you
need it. It is not as quick as withdrawing money from your
bank account, however. After the mutual fund company receives
your authorization, your money will be either sent to you
in the form of a cheque or deposited directly into your bank
account. Some companies also allow redemption by telephone
or fax, provided you authorize this when you initially buy
the fund.
Record keeping: All mutual fund companies provide
unitholders with regular statements detailing all transactions,
income earned, and the total value of all funds held. Moreover,
when you buy or sell units in a mutual fund, you automatically
receive written confirmation. You also receive yearly statements
detailing the tax status of all earnings in your non-registered
funds, including dividends and capital gains information.
The fund company issues either a T3 or a T5 slip for tax purposes,
listing the type and amount of income you must report on your
income-tax return.
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Sales charges and management fees
Front-end: A certain percentage is deducted from each
payment into the fund to pay for commissions. The rate varies
and can be negotiated. Rates between 4% and 6% are not uncommon.
Back-end: You pay the sales charge when you sell the
fund. If you keep the fund long enough (usually 7 years) there
are no charges. If you sell before the 7 years are up you
pay based on a sliding scale; e.g.: first year 4%, Second
year 31/2%, etc.
No-load: No sales charges when you go in or go out.
You still do pay a management and administrative expense fee.
Management and administrative expense fee: No escaping
these charges. They are usually combined and expressed as
a ratio referred to as Management Expense Ratio (MER). The
range is usually between 1% and 3%.
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Classifying mutual funds
Money Market Funds: Used primarily as a place to "park"
money while trying to figure out which way the markets are
going or simply having it available to be spent. They include:
federal and provincial Treasury bills (T-bills), short-term
corporate notes, and banker's acceptances.
Fixed Income Funds: Used primarily to provide a regular
fixed income. Included are: bond funds, dividend funds and
mortgage funds.
Equity or Growth Funds: The most popular of all mutual
funds. Investments are in Canadian or foreign stocks and the
main purpose is to achieve growth through capital gains. Included
are: Canadian equity funds, US equity funds, and a broad range
International funds that either invest in specific geographic
regions or countries.
Real Estate Funds: Investments are primarily in industrial
and commercial real estate and earnings come from rent and
increased values of the properties.
Balanced Funds: The goal is to offer investments in
a variety of investments described thus far to achieve balanced
growth. The balance between investments is primarily between
fixed income securities and equities. The range usually fluctuates
between 40 and 60 percent.
Segregated Funds: These are the same as any other
mutual fund except that they are only offered by or through
a life insurance company. The key difference with regular
funds is that when you die you are guaranteed to get the money
back that you put in and at maturity - usually defined as
10 years from now you are guaranteed a minimum payment of
a specified percentage of all your deposits.
Open and Closed-end Funds: Most mutual funds are open-end.
It means that the fund always accepts new deposits. Closed-end
funds have a fixed number of shares from the beginning. Once
those are sold the only way to buy into the fund is to buy
shares from a current owner.
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What funds are right for you?
Many investors consider just three types of funds: stocks,
bonds, and cash. That's too narrow. You should invest in different
types of mutual funds, including those that invest for value,
those that invest for growth, those that buy small companies,
those that buy large companies, and those that invest overseas.
Simply put: don't put all your eggs in one basket.
The correct mix (basket) differs for each individual investor.
Your correct mix depends on how sensitive you are to risk,
your investment objectives and your investment time horizon.
You may wish to use or Risk Sensitivity Analyzer and our Financial
Planning Analyzer to put you on the road to determining
which funds are right for you.
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