Key takeaways:

  • A mutual fund is a professionally managed investment that pools money from different investors to invest in assets. 
  • Mutual funds offer many benefits, including diversification, professional money management, cost-effectiveness and convenience. 
  • The most popular types of mutual funds include all-in-one portfolio solutions, equity, fixed-income, balanced and index funds. 
  • The best mutual fund for you depends on your unique investment goals, risk tolerance and preferences. 
  • Before investing in a mutual fund, it's important to have a clear understanding of all the associated fees. 

Even if you don't own a mutual fund or understand exactly how they work, you've likely heard people talk about them as one of the ways you can invest. Mutual funds have been one of the most popular financial products in Canada for decades, with 61% of Canadian investors having them in their investment portfolios.1

Mutual funds deliver instant diversification and professional money management in a cost-effective vehicle that’s easy to access. 

If you want to learn more about mutual funds and understand why they've stood the test of time, we're here to help. 

So, what is a mutual fund?

A mutual fund is a professionally managed investment that pools money from different investors to invest in assets like stocks, bonds, short-term money market instruments or other securities. Supported by a team of analysts, a portfolio manager is responsible for investing the money to try to achieve a specific goal for the fund. 

For instance, the goal might be to generate long-term growth or to generate income. It's this overall goal that also determines how your money is invested. Does it go into stocks? Government bonds? Exchange-traded funds (ETFs) or other asset classes? 

Key benefits of a mutual fund

Now that you know what a mutual fund is, it's time to get to the really important questions. How can a mutual fund help you to achieve your long-term financial goals? There are four key benefits associated with adding mutual funds to your overall investment strategy. 

1. Diversification

You've likely heard the phrase, "don't put all of your eggs in one basket." It's an old expression, but it still holds true. If you put all of your eggs in one basket and then you drop the basket, there goes breakfast. 

The same is true when it comes to investing. A single mutual fund can give you access to a range of securities to help you balance your risk and reward. 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 can be less risky than investing all of your money into the stock of a single company. 

2. Professional money management

If you don't know a lot about investing, or you simply don't have the time to spend micro-managing your portfolio, you can benefit from a professionally managed mutual fund. When you invest in a mutual fund, a professional fund manager selects the securities within the fund and continually monitors the holdings. The investment knowledge and experience a professional manager brings can be an invaluable resource. 

3. Cost-effectiveness

When you buy or sell a stock, there's usually a commission associated with the transaction. On top of the time, knowledge and research, commissions can really add up when building a diversified portfolio on your own. 

Mutual funds deliver access to a diversified basket of securities in one single investment. Mutual funds also offer low investment minimums. If you're a new investor, you can easily get started with an initial investment of $500, or less in many cases. 

4. Access and convenience

Mutual funds make investing easy for several reasons. First, all mutual funds allow you to buy or sell your fund units daily. Second, if your mutual fund distributes dividend, interest or capital gains income you can choose to automatically reinvest the income to buy units. Third, you can set up pre-authorized contributions to invest a fixed amount of money on a regular basis. Lastly, mutual funds 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 available in Canada to meet varying risk profiles, goals and interests, five of the most popular types of mutual funds include: 

1. Portfolio Solutions 

Portfolio Solutions make investing less complicated by providing a complete diversified solution for you that is professionally managed to help you stay on track with your investment goals.  Portfolio Solutions have a mix of different investments, like stocks and bonds, carefully selected, combined and continuously monitored to manage risk and take advantage of opportunities. 

Typical Investment Objective: Varies, but aligned with long-term goals 

2. Equity Funds

Equity funds invest primarily in stocks. Equity funds generally assume a higher level of risk in pursuit of 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, investment style (for example, growth or value) or even industrial sectors (like finance, energy and technology). 

Typical Investment Objective: Long-term growth

3. Fixed Income Funds

Fixed income funds, also called bond funds, primarily invest in government and corporate bonds. When you invest your money in a fixed-income fund, you can often expect to earn income in the form of interest income. 

While the total return potential of fixed income funds is lower than equity funds, the risk assumed is generally lower. 

Typical investment objective: Regular income 

4. Balanced Funds

If an equity fund feels too risky, but a fixed income fund feels like you're playing things a little too safe, then a balanced fund might be the right fit for you. 

Balanced funds are a 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 types of funds typically carry less risk than equity funds and more than fixed-income funds, given their dual role. 

Typical investment objective: Long-term growth and income 

5. Index Funds

If you're looking to keep your investing costs down, you might consider an index fund. Index funds are passively managed funds designed to replicate the performance of a specific benchmark. For instance, a fund might track the S&P 500 Index or the S&P/TSX Composite Index. The goal of an index fund is to track the performance of the reference index as closely as possible. 

Typical investment objective: Varies according to the type of index fund, such as equity or fixed income

Understanding mutual fund fees

There's a cost associated with the value you receive from mutual funds. Before you buy an investment, it's important to have a clear understanding of all the associated fees. You can expect to see two different fees associated with mutual funds — a management expense ratio (MER) and sales charges. 

Management Expense Ratios (MERs)

A fund's MER represents the annual fee associated with running and servicing a mutual fund. It's shown as a percentage of the fund's assets and varies based on the type of investment fund you purchase. While fees can vary from fund to fund, the MER generally consists of four distinct inputs: a trailing commission, an investment management fee, taxes and fixed administration fees (and other fund costs). A trailing commission covers the cost of the advice and service you receive from your financial institution (and your advisor) and can vary depending upon the fund chosen and the particular fund provider.

$1000 invested in an equity mutual fund with an MER of 1.73% 3.   -	52% - $9.00 Trailing Commission* -	35%- $6.00 Investment Management fee -	10%- $1.72 Taxes -	3%- $0.60 Fixed administration fees (FAF) and other fund costs Total cost = $17.32

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). A front-loaded fund requires you to pay this charge when you purchase the fund. A back-end loaded fund requires you to pay the charge when you sell (this is no longer permitted). Today, many mutual funds — including those Scotiabank sells — are sold on a “no-load" basis, which means there's no sales charge when you buy or sell. Make sure you speak with your advisor to gain a full understanding of all of the fees associated with your investment. 

A word about risk

Like most investments, mutual funds come with a certain amount of risk. While mutual funds are a great way to diversify your portfolio, they still experience volatility. Volatility is a measure of how much an investment fluctuates. A highly volatile investment can move way up or down in price, creating more risk — but also the potential for more reward. 

For instance, an equity fund usually presents a higher level of risk (and potential for reward) than a bond or fixed income fund, although this isn't always the case. 

Unlike your bank account, mutual fund investments are not covered by the Canada Deposit Insurance Corporation, the Autorité des marchés financiers' fonds d'assurance-dépôts (Québec) or other deposit insurance. This goes for all investments in stocks and bonds. 

To learn more about the risk associated with a particular fund, you can read through the Fund Facts and Simplified Prospectus documents. Or, talk to an advisor. 

So, which mutual funds are right for you?

The short answer is that the best mutual fund for you depends on your unique investment goals, risk tolerance and preferences. 

A Scotiabank advisor can work with you to create a customized financial plan complete with investment recommendations that include mutual funds to 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 get your finances on track for your future? Come in and speak to a Scotia advisor today.