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.
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
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.
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.
Thankfully, 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 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.
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Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed or insured by the Canada Deposit Insurance Corporation or any other government deposit insurer, their values change frequently and past performance may not be repeated.
*The Investment Funds Institute of Canada (IFIC) Monthly Investment Fund Statistics, February 2019.
Legal Disclaimer: This article is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.