Mutual Funds

A Mutual fund is a pool of money and investments (e.g. stocks, bonds and other types of investments) that are managed by a professional fund manager.

A mutual fund typically focuses on specific types of investments. For example, a fund may invest in:

High-quality government and corporate bonds,
Stocks from large companies,
Stocks from certain countries,
Stocks in certain industries, or
A mix of stocks and bonds.

How does a mutual fund work in Canada?

When you put money into a mutual fund, it becomes part of an investment pool managed by professionals who buy stocks, bonds or other assets on behalf of the fund. As assets in the fund rise in value, your share of the fund (typically measured in “units”) will also increase in value. If the value of the fund’s assets decreases, so will the value of your units.

You can own mutual funds in registered accounts like RRSPs, RRIFs, RESPs, TFSAs and some pension plans. You can also own corporate class mutual funds, which may offer certain tax advantages for non-registered accounts.

Types of mutual funds

Equity mutual funds

Equity mutual funds primarily hold shares issued by individual companies. The manager typically specializes in investing within different locations (Canada and globally), different industries, and different company sizes, including large, mid-size or small companies.

Balanced mutual funds

Balanced mutual funds hold a mixture of equities and fixed-income investments. These funds can help you diversify your investment portfolio by investing in asset classes such as stocks, bonds and cash.

Fixed-income mutual funds

Fixed-income mutual funds primarily invest in bonds and other debt securities. They have the potential for growth while providing a source of income.

Managed solutions

Managed solutions often include multiple funds in a single portfolio. This allows the manager to diversify across multiple sectors to build portfolios reflecting an investor’s risk profile: from conservative to aggressive.

Corporate class funds

Corporate class funds hold stocks, bonds and other investments within a mutual fund corporation, instead of a mutual fund trust. This allows you to invest in shares of the corporation instead of units of a mutual fund trust.

Index mutual funds

Index mutual funds hold equities or fixed-income securities chosen to match the returns of a specific index, such as the S&P/TSX Composite Index.

Specialty mutual funds

Speciality mutual funds hold equities or fixed-income securities in a specific geographic region (such as Asia or Europe) or sector (such as information technology or infrastructure).

Diversified income funds

Diversified income funds aim to generate income by investing across various asset classes, sectors and parts of the world.

What are the benefits of mutual funds?

Mutual funds are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or other assets. They offer several benefits to both novice and experienced investors:

Diversification

Reduced Risk: Mutual funds provide instant diversification by investing in a wide range of securities across different sectors, industries, or geographic regions. This reduces the risk associated with holding a single security since the poor performance of one investment may be offset by better performance in others.
Access to Broad Markets: Diversification helps you gain exposure to multiple asset classes, which might be difficult to achieve individually. For example, a mutual fund could invest in hundreds of different stocks, bonds, or other securities.

Professional Management

Expert Fund Managers: Mutual funds are managed by professional portfolio managers who have the expertise, experience, and resources to make informed investment decisions. They conduct in-depth research and continuously monitor the markets to optimize the fund’s performance.
Active vs. Passive Management: Depending on the type of mutual fund, you may benefit from either active management (where fund managers actively buy and sell securities to outperform a benchmark) or passive management (where the fund simply tracks a specific market index).

Affordability and Accessibility

Low Minimum Investment Requirements: Mutual funds typically have relatively low minimum investment thresholds, making them accessible to a wide range of investors. You can start investing with as little as a few hundred dollars.
Dollar-Cost Averaging: With regular contributions, such as through a systematic investment plan, you can benefit from dollar-cost averaging. This means you buy more shares when prices are low and fewer when prices are high, potentially lowering the average cost per share over time.

Liquidity

Easy to Buy and Sell: Mutual fund shares can be bought or sold on any business day at the net asset value (NAV) per share. This provides liquidity, meaning you can quickly access your money when needed, unlike some other investments (such as real estate) that may take time to convert to cash.

Cost Efficiency

Economies of Scale: By pooling resources from many investors, mutual funds can achieve economies of scale, resulting in lower trading costs and fees per investor. The cost of investing in a diversified portfolio individually would be significantly higher.

Transparency and Regulation

Regulated by Authorities: Mutual funds are regulated by government authorities, such as the U.S. Securities and Exchange Commission (SEC) in the United States or the Canadian Securities Administrators (CSA) in Canada. They must adhere to strict regulations that protect investors, including regular disclosure of holdings, fees, and performance.
Regular Reporting: Mutual funds provide regular reports to their investors, including statements, annual reports, and prospectuses, detailing the fund’s performance, strategy, and expenses.

Convenience and Simplicity

One-Stop Investment Solution: Mutual funds provide a convenient way to invest in a diversified portfolio without requiring extensive knowledge or time to research and monitor individual securities.
Automated Investment Options: Many mutual fund companies offer automatic investment plans (AIPs) that allow you to invest a fixed amount regularly, making it easier to maintain a disciplined investment approach.

Frequently Asked Questions

Do mutual funds pay dividends?

Mutual funds pay distributions, not dividends. A dividend is a payment (in cash or assets) from a corporation, whereas a distribution is a cash payment from a mutual fund.

How do I know if mutual funds are right for me?

Mutual funds may be ideal for long-term investors, as the value of securities held by the fund can change over time.

Are mutual funds a good investment in Canada?

Since mutual funds are managed by professionals, they can be a great option for people who don’t want to supervise their investments by themselves.

Are mutual funds taxable in Canada?

Yes. Any income that a non-registered mutual fund earns is flowed through to the fund owner and taxed in the owner’s hands as if the owner had personally owned the investments that had produced the income. Funds that are registered (RRSPs, RRIFs, RESPs, RDSPs, ALDAs and FH S As) receive the same tax treatment accorded to their registration type. Generally, any type of income generated from a mutual fund registered as a tax-free savings account (such as interest, dividends, foreign income and realized capital gains) is tax-free.

Are returns from mutual funds guaranteed?

Unlike a product such as guaranteed investment certificate aguaranteed investment certificate, the returns on mutual funds are not guaranteed. Past performance is no guarantee of future performance, and the value of a fund can change over time.