Mutual funds
What is a mutual Fund?
A mutual fund is a financial intermediary that pools money
together and invests in a predetermined investment objective.
They are very cost efficient and very easy to invest in. Investors
are able to purchase stocks or bonds with much lower trading
cost with the advantage of being diversified at the same time.
Before you invest in a mutual fund you should:
- Determine your investment objective.
What is this investment going to be used for: education,
buying a house, retirement etc.
Sometimes your investment objectives will change as your
life changes. An example of this would be getting married
or having a child.
- Determine your risk tolerance.
You should ask yourself how much risk tolerance you are
comfortable with. If your not sure, there are questionnaires
that can help you determine what risk tolerance you have.
- Determine your time horizon.
Depending on your time horizon, it may affect your risk
tolerance and the type of investment you are willing to
invest in. For instance if you are going to be purchasing
a house in the near future you may invest in a more secure
investment rather than a riskier investment which you may
invest in for your retirement because there is more of a
time horizon.
- Find out how much management
fees are going to cost.
Professionals manage a mutual fund therefore, there are
going to be management fees associated with mutual funds.
They determine which investments to invest in based on the
mutual fund objectives. Different mutual funds have different
management fees. Talk to your investment advisor to find
out what the management fees are for the specific investment.
Some features and benefits of mutual funds
When purchasing a mutual fund you are purchasing a professionally
managed mutual fund. The managers have extensive knowledge
and spend a lot of time researching the markets. They can
often produce better portfolio performance than you could
achieve on your own. Mutual funds are often investing in a
variety of securities, which reduce the risk by diversifying.
Depending on the type of investment you can be diversified
against asset classes, geographic regions and industry securities.
A mutual fund can be very affordable. Many mutual funds companies
have a minimum deposit of $500 or monthly instalments of $25.
Also you are able to redeem your investments on any business
day apposed to fixed income securities, which you cannot.
There are hundreds of mutual funds that you can choose from.
To determine which mutual fund is right for you, you should
talk to your investment advisor.
Some of the Mutual Fund Companies we deal with:
Types of Mutual Funds
Income Funds -
Money Market Funds –
Has the lowest level of risk. Invests in short term investments
such as
T-Bill and term deposits.
Mortgage Funds –
Has a low level of risk – Invests in residential first
mortgages with maturities from one to five years.
Bond Funds – Has
a low to moderate level of risk – Invests in bonds
and debentures issued by governments and corporations.
Dividend Funds –
Has a moderate level of risk – Invests in high-yield
preferred shares and dividend paying common shares of Canadian
companies.
Growth Funds –
Equity Funds – Has
a high level of risk – Invests in common shares of
corporations and securities convertible into common shares.
International and Global Funds
– Has a moderate to high level of risk –
Invests in securities from specific industry, economic sector,
geographical area.
Real Estate Funds –
Has a moderate to high level of risk – Invests in
commercial and industrial property.
Combined Funds –
Balanced Funds –
Has a moderate level of risk – Invests in bonds, preferred
shares and common shares in proportion to a fund’s
investment objectives.
Asset Allocation Funds –
Has a moderate to high level of risk – Invests in
bonds, preferred shares and common shares with no restrictions
on proportions.
Index Funds – The
level of risk depends on the index – Index funds try
to match the securities of a specific index, such as the
TSX (formally TSE 300)
General Information
Asset Allocation
Asset allocation refers to the process of dividing or allocating
investments among three basic asset classes: Cash, bonds
and equities (stocks). Asset allocation is the most important
factor affecting portfolio returns.
Asset allocation provides a strategy for matching client
objectives into an efficient portfolio of equities, bonds
and cash.
The advisor’s understanding of a client goals and
objectives will result in added value by structuring a portfolio
using both tactical and strategic allocation strategies.
Tactical Asset Allocation
Tactical asset allocation is the short-term approach (12
months) to setting the asset mix.
To determine the asset mix, which is composed of stocks,
bonds and cash, managers rely on a strategy that regularly
analyzes economic data and trends to determine which asset
class to emphasize at any given time.
Strategic Asset Allocation
Strategic asset allocation is a much longer-term approach
to setting the asset mix. This approach is based on long-term
benchmarks and setting up the portfolio to minimize risk
and decrease volatility. If tactical asset allocation looks
at twelve months, strategic asset allocation looks at five
to ten years. It uses more of a buy and hold approach and
re-balancing when appropriate. The simplest form of strategic
asset allocation is a fixed balanced fund, which has restricted
limits on how much can be invested in equities and fixed
income
To help the investor determine which asset allocation best
suits the investor’s needs are investment questionnaires.
The investment questionnaires determine individual’s
objectives, time horizon, risk tolerance level and financial
situation. The result of the questionnaire then identifies
the particular type of investment the investor should invest
in.
Mutual Fund Commissions
Front end Load – The range for front
load commissions us usually 0%-5% of the amount invested.
The agent has complete discretion on the percentage charged.
The client pays the commissions from the money being invested,
and the balance is used to buy units in the fund. The agent
often receives a higher trailer commission on front load
purchases.
Deferred Sales Charge – Deferred
sales charge is the most common commission choice. The fund
company usually pays a set commission as a percent of the
amount invested. A few companies offer a DSC commission
range. For these companies it is up to the agent to clearly
identify the DSC option chosen. The client pays nothing
up front but will be subject to a decreasing withdrawal
fee which is eliminated usually in five, six or nine years.
Low Sales Charge – a few companies
only offer the low sales charge option. It is usually a
combination of a low front load charge of 0% - 2% and a
higher than normal trailer commission.
No Load – A number of companies
do not pay commissions on their funds. Some of these companies
will pay a trailing commission, but it is often low in relation
to the trailer on similar products offered by other companies.
To learn more in-depth information regarding about mutual
funds visit:
Fidelity
Website – Mutual Fund Essentials
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