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Back to Mutual Funds section Learning Centre - Mutual Funds
Mutual Fund Questions & Answers

For those looking for a good investment vehicle, mutual funds may be exactly what you are looking for. We have gathered the answers to a few questions to give you more information and help to make your investment decision easier.

General Information


How do I decide which investment path to follow?

What is a mutual fund?

What are the advantages of a mutual fund?

How do I choose the funds to meet my goals?

What is involved with opening a mutual fund?

What ongoing costs will I incur when I own a mutual fund?


Investment Information


How is my investment valued?

Is a money market fund valued the same way as a mutual fund?

What if I want to transfer part or all of my investment to another member of the mutual fund company's "family of funds"?

How easy is it to redeem my investment?


Taxes and Distributions


What happens to the income earned?

Why do I receive distributions throughout the year?

Why are most Canadian mutual funds, for tax purposes, classified as "flow through" trusts or corporations?

Are mutual funds tax efficient?


Mutual Funds: General Information

First, you have to determine what your ultimate financial goals are. That sounds pretty basic but you would be amazed at the number of people who really have not thought this out. Sitting down to map out your objectives is the best way to make an informed choice. You can then devise a plan to choose investments that will match your financial goals.

If you are like most Canadians, you will have a number of different objectives and you will probably need to allocate your investment resources to a variety of different financial vehicles in order to achieve these goals. Whatever your goals, mutual funds can plan an important role in your portfolio by helping you diversify.

What is a mutual fund?

A mutual fund is a smart and simple way to invest your savings by pooling them with those of thousands of other Canadians in a common fund which is then invested in a range of securities. Assets in the fund are not owned by the mutual fund manager. Instead, they are owned by you and the other investors and are managed on your behalf.

What are the advantages of a mutual fund?

The fund is managed by professional investment advisors and the mutual fund company also provides full-time administrative and support services. Also, with many investors contributing to the fund, the fund manager can diversify your investment despite the fact that your individual contribution may be relatively small.

A mutual fund can help you build your future, calmly and confidently, without asking you to invest a fortune or expend your valuable time on the complexities of investing. Mutual funds give you a distinct advantage as you spread your risk over a wide range of investment opportunities, allowing yourself a better chance of seeing your money grow.

How do I choose the funds to meet my goals?

There are a number of considerations that you should weigh in order to make your decision. Determining how comfortable you are with varying degrees of risk is essential if a higher-risk investment will cause you to lose sleep at night. It is important however, that you develop a clear understanding of the real nature of risk as it applies to different investments over time. Sometimes, choosing the "no risk" option can be the biggest risk you can take due to missing out on beneficial opportunities.

There are many factors in your daily life that may also influence your decision. You should assess the timing of major expenses, such as buying a house, paying for children's education, and even vacations, in order to build your investments so that the proceeds will be ready when you need them.

What is involved with opening a mutual fund?

Mutual funds can only be purchases through a registered mutual fund representative who may be a registered securities dealer, investment fund dealer, stockbroker or financial planner. Normally, these financial advisors are remunerated through a commission or sales charge for the advice they give you.

You may choose to purchase mutual funds in one of two ways: the sales charge option or the deferred sales charge option. For a more complete and detailed description of these options, please refer to the fund prospectus.

Sales charge option: You pay a sales commission to the mutual fund representative for your purchase when you buy units in a fund. When you sell the units, you will not be required to pay a redemption fee. This is commonly referred to as a "front-end load".

Deferred sales charge option: There is no charge when you invest however you may be charged a redemption fee when you sell during a certain period. Units purchased under this option are subject to a redemption fee, usually beginning at approximately 4.5 per cent of the price paid, declining by 0.5 per cent each year. This type of option is also known as a "back-end load".

What ongoing costs will I incur when I own a mutual fund?

Fund managers typically charge an annual management fee which can vary substantially between different types of funds. All fees are outlined in the fund prospectus and investors should make themselves aware of this expense. In most cases, published performance figures for mutual funds are net of the management fee.

Mutual Funds: Investment Information


How is my investment valued?
When you invest in a mutual fund, you buy units of that fund. Generally, the value of your units is determined at the close of each business day.

The value of a unit in the fund is calculated by adding the total market value of all securities and other assets, such as cash owned by the fund, subtracting all liabilities (including management fees), and then dividing that figure by the number of total units outstanding in the fund. The result is called the "net asset value per unit" which appears in the business section of most daily newspapers the next day.

Is a money market fund valued the same way as a mutual fund?

No. On a short-term money market fund the yield is calculated daily and any income distributed monthly. The price of units in this type of fund remains constant at $10 per unit.

What if I want to transfer part or all of my investment to a member of the mutual company's "family of funds"?

There should not be a problem with this provided the mutual fund company has a family of funds. If so, your investment, in part or whole, can be transferred to , subject to applicable commissions, restrictions and any tax liabilities. This process is explained in further detail in the fund prospectus.

How easy is it to redeem my investment?

It should be very easy for you to redeem your investment. Any time you want to cash in part or all of your investment, the fund company need to receive proper documentation as well as your authorized request in writing. If handled directly, a cheque will normally be issued and sent to you within five business days.

It may however be easier for you to have your financial advisor complete the redemption on your behalf. Also, if you are redeeming your investments, your financial advisor should review your portfolio with you to ensure that it is consistent with your goals.

Mutual Funds: Taxes and Distributions

What happens to the income earned?

Normally, your income or distributions consist of capital gains, dividends, interest income or a combination of these. You may choose to receive your distribution by cheque or direct deposit or have them automatically reinvested in more units of the fund.

Why do I receive distributions throughout the year?

Since you and your fellow unit holders are the ultimate owners of the funds investments, the fund managers pass through to you all of the dividends, interest and capital gains income that the fund earns after deducting any expenses. Funds that earn regular income such as money market, bond funds or dividend funds may pay distribution more frequently.

Why are most Canadian mutual funds, for tax purposes, classified as "flow through" trusts or corporations?

As the name implies, all taxable income earned by a fund flows through to unitholders. Ultimately, tax is minimized as the taxation rate for individuals is generally lower than that for funds, which are taxed at the top rate

Are mutual funds tax efficient?

Several factors affect a mutual fund's tax efficiency:

  • If you fund has a high turnover ratio - which indicates how often the fund's securities are traded - you may have higher capital gains each year than if your fund manager subscribes to a "buy and hold" strategy.
  • Does your fund hold a high percentage of assets with unrealized capital gains? If so, taxes will be triggered when the fund sells those assets.
  • Is your fund growing quickly? If so, distributions will likely be spread among more investors, resulting in a lower per unit gain.

A tax efficient fund, or one that minimizes the amount of tax currently payable, may help you defer these taxes longer and thereby increasing your current cash flow.

Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this Executive Overview are not intended, nor should they be relied upon, to replace specific professional advice. Before acting al contained herein, readers should seek advice that is appropriate to their personal circumstances from a professional advisor.





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