Although Canada’s investment landscape keeps evolving to offer new products, mutual funds remain the most popular option for Canadian investors, with mutual fund assets totalling $1.51 trillion at the end of February 2019.*

And for good reason—mutual funds, as opposed to investing in an individual stock, 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.

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What is a mutual fund?

A mutual fund is an investment vehicle made up of a pool of money provided by individual investors for the purpose of investing in securities such as stocks, bonds and other assets.

Actively managed mutual funds are operated by professional portfolio managers, who buy and sell investments in order to deliver gains for the fund’s investors.

Supported by a team of analysts, the portfolio manager’s primary goal is to identify investment opportunities that help enable the fund to outperform its corresponding benchmark, such as the S&P TSX Composite Index, Canada’s most widely followed stock index. 

Below are just some of the benefits provided by mutual funds.

Key benefits: The case for mutual funds

1. Diversification

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. Most mutual funds hold well over 50 securities to help spread risk throughout the fund and provide a variety of return streams.

If one investment is down, those losses can potentially be offset by another of the fund’s holding. Strong diversification also helps reduce wild swings in the value of your investment (which may help you sleep better at night). This is a much less riskier proposition than investing all of your money into the stock of a single company.

2. Cost-effectiveness

Open and effective communication is essential when it comes to planning for college or university. Make sure your kids understand all the costs involved and if they will be playing a role in helping to fund their education – whether that means taking on student loans or part-time work during their schooling.

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 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 once a day at the close of the market. Mutual funds also conveniently allow you to automatically reinvest income from dividends and use dollar-cost averaging, a simple process that allows you to automatically invest a pre-determined amount of money on a regular basis (usually taken from your bank account, timed with your paycheque). Mutual funds also deliver access to a wide array of markets across the world, which would not be accessible to everyday investors.

Understanding mutual funds fees

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.

1. Sales charges

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.

2. Management Expense Ratios (MERs)

Each mutual fund pays an annual fee to its management company for overseeing the fund and its investments. The management expense ratio (MER) is the total of the management fee and Fixed Administration Fee (or operating expenses) and is shown as a percentage of the fund’s assets, usually ranging from 1% to 3%.

Mutual funds 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. Stocks are usually riskier than bonds, so you would generally expect an equity fund to be riskier than a fixed-income fund–although this is certainly not always the case.

Take time to learn about a particular fund’s risk rating by reading its Fund Facts and simplified prospectus.

Which mutual funds are right for you?

The short answer is that much depends on your unique investment goals and preferences. A financial 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.

Ready to invest or learn more about mutual funds? Your financial advisor can help you find the right choice for you.