Although Canada’s investment landscape keeps evolving to offer new products, mutual funds remain a popular option for Canadian investors. Mutual funds are one of the most popular investment options with 64% of Canadians citing them as their most frequently used investment product.1
And for good reason—mutual funds deliver instant diversification and professional money management in a cost-effective vehicle that’s easy to access. You’ll find mutual funds are widely available for sale through banks, financial planning firms, brokerages, credit unions and other investment firms.
So what exactly is a mutual fund?
A mutual fund is a professionally-managed investment that pools money from different investors to invest in stocks, bonds, short-term money market instruments or other securities. Supported by a team of analysts, the portfolio manager’s primary goal is to identify investment opportunities that help achieve the fund’s investment objectives set out, such as capital preservation, capital growth and/or income generation.
The following are just some of the benefits provided by mutual funds.
By investing in a range of different securities, mutual funds help diversify risk, which is really another way of saying that you won’t be putting all your eggs in one basket. Many mutual funds hold well over 50 securities to help balance risk and return potential for investors. If one investment is down, those losses can potentially be offset by another of the fund’s holdings. Diversification also helps reduce swings in the value of your investment. This is a much less riskier proposition than investing all of your money into the stock of a single company.
Imagine if you had to go out and buy each individual stock for your own portfolio. The time and money spent on commissions would be significant. Mutual funds deliver access to a diversified basket of securities in one single, cost-effective transaction. Another cost-effective aspect of mutual funds are the low investment minimums, which means new investors can get started with an initial investment as little as $500 – or even less in many cases.
3. Professional money management
Mutual fund investors get the benefit of having a professional manager reviewing the portfolio on an ongoing basis. Their investment knowledge and experience can be an invaluable resource, especially for many investors, who simply don’t have the time or investment expertise to micro-manage their investments.
4. Access and convenience
All mutual funds allow you to buy or sell your fund units daily. Mutual funds also allow you to automatically reinvest income distributions and through Pre-Authorized Contributions you can invest a fixed-dollar amount on a regular basis. Mutual funds also deliver access to a wide array of markets across the world, which would not be easily accessible to everyday investors.
Types of mutual funds
Although there are a seemingly endless variety of mutual funds, here are four of the most basic categories.
1. Equity Funds
These funds generally assume a higher level of risk to deliver a higher level of return. The range of equity funds is extremely broad, but common sub-categories include geography (for example, Canadian, U.S. or global equity funds), company size or investment style (for example, growth or value), to name just a few.
Typical Investment Objective: Long-term growth
2. Fixed Income Funds
These funds focus on purchasing debt instruments, such as government and corporate bonds, which generate interest income that can be passed onto unitholders. While the total return potential of fixed income funds is lower than equity funds, the risk assumed is generally lower and income potential is often greater.
Typical Investment Objective: Regular income
3. Balanced Funds
A very popular type of mutual fund focused on offering a blend of long-term growth and regular income by investing in a mix of stocks and bonds. These type of funds typically carry less risk than equity funds and more than fixed income funds given their dual role.
The majority of Scotia Portfolio Solutions fall into this category by investing in a diversified mix of fixed income and equity funds in the convenience of a single investment to provide growth potential while managing risk. Scotia Portfolio Solutions are available in a range of asset allocations to meet a variety of investment goals and risk tolerances. Visit scotiabank.com/portfoliosolutions to learn more.
Typical Investment Objective: Growth and income
4. Index Funds
Designed for cost-sensitive investors, index funds are passively managed funds whose holdings are designed to track the performance of a specific index, such as the S&P/TSX Composite Index. This is in stark contrast to an actively managed fund, which relies on a portfolio manager to select securities in an effort to outperform or add value over a benchmark index over time
Typical Investment Objective: Varies according to type of fund (equity, fixed income etc.)
There’s a cost for the value you receive from mutual funds. It’s important to have a clear understanding of all fees associated with an investment. There are usually two key fees that may be associated with mutual funds.
Management Expense Ratios (MERs)
A fund’s MER represents the costs of running and servicing a mutual fund. It is shown as a percentage of the fund’s assets and varies based on the type of fund purchased. It is made up of four distinct inputs as shown in the example to the right:
Sales charges are the commissions that you may have to pay when you buy or sell a fund (also known as “the load” of a fund). If you pay this charge when you buy the fund, it’s called a front-end load. If the charge is levied when you sell, it’s called a back-end load. Today many mutual funds – including those sold by Scotiabank – are sold on a “no-load” basis, which means there is no sales charge when you buy or sell. It’s important to speak to your advisor to have a full understanding of all fees, if any, that are associated with your investment.
A word about risk
Although they are a diversified investment, mutual funds have risk and are not covered by the Canada Deposit Insurance Corporation, the Autorité des marchés financiers’ fonds d’assurance-dépôts (Québec) or other deposit insurance. The level of risk in a mutual fund largely depends on what it invests in. Equity funds are usually riskier than bond or fixed income funds – although this is not always the case.
Take time to learn about a particular fund’s risk rating by reading its Fund Facts and Simplified Prospectus.
So, which mutual funds are right for you?
The short answer is that much depends on your unique investment goals and preferences.
A Scotiabank advisor can work with you to create a customized financial plan complete with investment recommendations that include mutual funds that help you manage today’s priorities while preparing for your future needs – whether that’s retirement, buying a home or funding your child’s education.