Key takeaways:

  • Mutual funds remain a popular choice for Canadian investors, with total mutual fund assets reaching $1.8 trillion1, despite recent market shifts.
  • Key strategies for mutual fund investing include clear goal setting, consistent contributions and an understanding of your risk tolerance.
  • Knowledge about the tax implications of your mutual fund investment and understanding how mutual fund fees work is crucial for optimizing your returns.
  • A long-term investment approach is essential to weather short-term market fluctuations and achieve sustained growth.
  • Working with a financial advisor often leads to better investment decisions and greater long-term asset growth.

If mutual funds make up the bulk of your investment portfolio, you're not alone. Mutual funds have long been a favoured investment in Canada and continue to be a popular choice for many Canadian investors. As of October 2023 mutual fund assets in Canada totalled $1.8 trillion1, reflecting investors' ongoing trust despite recent market pullbacks.

It's not hard to see the reasons behind their popularity. Not only are mutual funds easily accessible — they can be purchased through banks, financial planning firms, brokerages, credit unions and other investment firms — but they also offer investors an easy way to diversify their portfolios.

And mutual funds, other than index funds, are actively managed. This means professional portfolio managers, supported by a team of research analysts, do the heavy lifting of identifying and buying investment opportunities for the fund, and selling securities that no longer meet the fund's investment objectives.

A refresher: What is a mutual fund?

Each mutual fund in your portfolio pools money from different investors. Depending on the fund's investment objectives, this money is then used to purchase stocks, bonds or other securities, such as money market instruments. The mutual funds you're holding in your portfolio enable you to invest in a diverse selection of assets without the need to purchase each asset individually.

Wonder how you can make the most of your mutual fund investments? Become a more savvy mutual fund investor with our eight tips for better understanding mutual funds.

1. Know your investment goals

Before you begin investing in mutual funds, you need to know what your investment goals are. Are you investing for your retirement? Or maybe you want to fund your child's post-secondary education or save for a down payment to purchase a house.

How you invest depends on the goals you want to meet and what your timeline looks like, for example planning for retirement (long term) vs. saving for a down payment on a home (shorter term).

The first step to knowing your investment goals is to have a financial plan. A Scotiabank advisor can help you build a financial plan that assesses your current financial and investment goals. Once you have your plan in place, you'll be able to see how you can best achieve these goals.

2. Invest automatically with pre-authorized contributions

One of the best ways to fuel the growth of your mutual fund investments is to invest consistently. Pre-authorized contributions (PACs) help you do just that. With PACs, you’re in control of how much you save and how often you save. The amount you choose will automatically be deducted from your savings or chequing account and deposited into your investment account.

But the best part? Investing automatically with PACs lets you take advantage of an investment strategy known as dollar-cost averaging.

This simple strategy is based in part on the principle of “you can't time the market" (timing the market is a strategy where you actively try to buy low and sell high).

With dollar-cost averaging, you invest the same amount consistently, typically monthly, regardless of any fluctuations in the markets. This means that when there's a dip in the market, your investment dollars end up purchasing more mutual fund units, because during a dip, each unit costs less. This, in turn, lowers your average cost per unit.

Check out this interactive PAC video to see how you can leverage the power of PACs to grow your investments.

3. Understand your risk tolerance

Do you know your risk tolerance? Investing always comes with risks, as different factors can have an impact on global markets and your investments — events like increasing inflation, recessions, financial crises and even the COVID-19 pandemic.

One of the keys to successful investing is to know your risk tolerance. A lot of factors go into determining how well you tolerate risk. Some are psychological: for example, how would you react if a severe dip in the market caused your portfolio to drop by 20%? Would you step back and ride out market volatility, or would you be more inclined to sell off your investments so you could lock in your losses (often a move you'll regret)?

Other factors include the time horizon of your investment and financial goals, and your personal financial circumstances, like whether you have an emergency fund to draw from should the unexpected happen, like a layoff or a car repair.

Figuring out your personal risk tolerance can be tough. Your Scotiabank advisor can work with you to help you understand your risk tolerance and then select the right portfolio for you.

4. Have a diversified portfolio

Why do you need to focus on diversification when investing in mutual funds? After all, mutual funds give you instant diversification: When you hold a mutual fund, you are maintaining exposure to the securities the mutual fund invests in. The challenge is, if for example, your portfolio only holds equity mutual funds, you would leave yourself vulnerable to events like a stock market correction.

Portfolio solutions make investing less complicated. They are built to help achieve your most important financial goals and are continuously professionally managed to keep you on track. Portfolio solutions carefully combine different mutual funds and other investments into one convenient solution. 

You reduce your risk further by investing in a portfolio of investments across different asset classes (think stocks and bonds), sectors and regions that perform differently under different market conditions.

Mutual funds offer a wide range of investment opportunities that suit your specific needs and preferences.

Common types of mutual funds include:

  • Equity mutual fund. Equity mutual funds are funds that invest in stocks that can provide you with long-term growth potential. 
  • Fixed income mutual fund. A fixed income mutual fund invests in securities or debt instruments that offer regular income and potential for modest capital growth by investing in bonds, such as government or corporate bonds.
  • Money market mutual funds. Money market mutual funds invest in liquid, short-term investments, such as government Treasury bills (also known as T-bills). While they typically don't generate high returns, they provide relatively low risk. 
  • Balanced mutual funds. Balanced funds provide a balance between income generation and long-term capital growth by investing in a mix of equities and bonds. 

Portfolio solutions offer a diversified mix of mutual funds and other investments in the convenience of a single investment. The mix of investments is matched to your long-term goals.  

Learn how Scotia Portfolio Solutions can take the guesswork out of investing and make investing less complicated.

Other options. You can also purchase specific sector- or market-based funds. For example, if you want to invest in environmentally sustainable companies, Scotiabank offers a variety of low carbon mutual funds. And if you prefer a passively managed fund, you can invest in index funds. ScotiaFunds offers a variety of index funds that track Canadian and foreign markets.

Determining the ideal asset allocation mix to diversify your portfolio can be difficult. Ask your financial advisor for guidance on the asset allocations that make the most sense for your unique personal circumstances.

5. Understand the tax consequences

It's important to understand how mutual funds are affected by taxes, since the last thing you want is to have your return reduced by a larger-than-expected tax bill come April.

The first rule of thumb? Consider maximizing your contributions to tax-advantaged savings plans before you begin making investments held in non-registered accounts.

Contributing to a mutual fund held in your Registered Retirement Savings Plan (RRSP), for example, will reduce your taxable income. You aren't taxed on your investment growth until you withdraw the money in retirement. By this time, you'll likely be in a lower income bracket and taxed at a lower rate.

Your investment of after-tax income in a mutual fund in your Tax-Free Savings Account (TFSA) will grow on a tax-free basis and can be withdrawn tax free.

Investment income generated by mutual funds held in a non-registered account, however, will be subject to tax. The amount of tax varies depending on the type of investment income. Generally, the income mutual fund generate will be taxed as one or more of the following income types:

  • Interest income. For example, you'll earn interest income from a fixed income mutual fund that holds bonds.
  • Dividend income. If the mutual fund you're investing in holds stocks that pay out dividends (this is only the case if they are from Canadian corporations), the money you earn is taxed as dividend income.
  • Capital gains. When your mutual fund sells a security at a higher price than its purchase price, the difference is considered a capital gain.

Each type of income generated requires a different tax treatment. Taxes can get confusing, so it's always a good idea to talk with your accountant about the potential consequences of distributions from your mutual fund investments.

6. Understand mutual fund fees

The fees you incur when investing in a mutual fund help cover the cost of managing the fund and will vary depending on the mutual fund you select. It's important to understand what fees you'll pay, as these fees effectively impact the return you'll get from your investment.

Management expense ratio (MER). A mutual fund is actively managed by a team of investment professionals who do the research and decision-making necessary to identify and purchase optimal investments for the fund. The expenses of maintaining this team, plus trailing commissions, form the main part of a fund's MER. Other elements of the MER include operating expenses and GST/HST.

Did you know?

A Trailing Commission covers the cost of the advice and service that you receive from your financial institution and your advisor. It varies among funds and depends on financial institutions.


A fund's MER is calculated as a percentage of the total value of the fund's assets. For example, a mutual fund that's valued at $10 million with annual expenses of $150,000 has an MER of 1.5%.2

Loads. A fund's load is essentially a sales commission paid to the advisor or broker. Not all funds have a load. Mutual funds that don't have a load are called no-load funds.

There may also be other fees associated with the purchase of mutual fund units such as transaction fees, trading fees and brokerage fees.

7. Focus on the long term and avoid excessive trading

Once you've invested in a mutual fund, market conditions — such as the recent fluctuations that have dominated financial news headlines — may tempt you to sell your mutual fund shares. For example, a dip in the market might prompt you to consider switching out your equity fund for a lower risk money market mutual fund instead.

But while it can be tempting to react to short-term market turbulence by revising your portfolio, the key to successful investing is to keep your focus on the long term. By staying true to your long-term investment strategy, you'll be better able to weather the short-term bumps and turns of market volatility that every investor faces along their investment journey.

Cultivating a long-term investment mindset is the best way to stay the course, stick to your financial plan, and meet your investment goals. By having a long-term mindset, you can focus on the big picture, instead of trying to respond to every short-term market event.

8. Invest with advice

With so many mutual funds to choose from, the world of mutual fund investing can get confusing at times. This is where your Scotia advisor can help. Financial advisors have the knowledge and expertise to help you work towards realizing your investment goals. The benefits of getting financial advice is backed up by the research: According to a study, investors who worked with a financial advisor for more than 15 years had on average 2.73x more assets than those who didn't.3

Even if you prefer to apply a DIY approach to investing and select your own investments, a financial advisor can provide specialized services you'll find helpful. From assisting you in building or adjusting your financial plan to highlighting the pros and cons of tax-efficient investment vehicles, financial advisors can help you meet your financial goals.

Ready to make sure your finances are on track? Come in and speak to a Scotia advisor today