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.
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
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
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.
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
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.
What happens to the
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.
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
Are mutual funds tax
Several factors affect a mutual
fund's tax efficiency:
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.
your fund hold a high percentage of assets with unrealized capital
gains? If so, taxes will be triggered when the fund sells those
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.