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 The
Companion Advisor: Investing
in Mutual Funds
The fundamentals of mutual funds
A Companion Advisor Article
Money Management Newsletter
By Toronto-Dominion Bank Agents Division
Ordinarily, to invest successfully, you require
time. Time to select your portfolio
of investments carefully and time to monitor them on a continual basis
to ensure adequate performance.
Most investment professionals and portfolio managers
suggest you also need a significant amount of money to be able to diversify
on your own; that is to buy a variety of stocks, bonds and other investments
to spread the risk and increase opportunities for greater returns. However,
through the purchase of mutual
funds, successful investing can be realized with much less time and
money.
In Canada, there are more than three thousand mutual
funds available, each designed to meet a specific investment objective.
There are high-risk growth funds, conservative funds, and specific funds
that fit just about any investor.
However, they all operate on the same principle. You,
along with many other investors, pool your money. Then a professional
investment manager makes decisions on what to buy and sell based on the
fund's objectives.
If you wish to minimize short term volatility (the
fluctuations in value of your investment), you'll probably select funds
that invest in government backed treasury
bills, bonds
or mortgages. If you are looking for growth potential and can tolerate
volatility, consider equity-based funds which would invest in shares of
major corporations, or small entrepreneurial companies in Canada or around
the world. There is a vast choice with risks and rewards widely varied.
How a fund works
Most mutual funds in Canada are "open-end"
meaning that you can invest directly into them and withdraw money at any
time. When you invest in a fund you receive a number of shares or units,
based on the value of the fund's units at the time of purchase.
Unit value, known as the net asset value per share
(NAVPS) is arrived at by taking all the assets within the investment
fund and subtracting its liabilities and administrative costs. The NAVPS
is then calculated by taking this amount and dividing it by the number
of units or shares outstanding. The price you pay for a fund unit is directly
linked to the value of all the investments in the fund's portfolio. Because
of the almost continuous movement of money in and out of a fund and fluctuation
in asset value, the NAVPS is usually calculated on a daily or weekly basis.
The return you will receive will depend on the type
of fund. Returns can be based on dividends, interest or capital gains
earned on investment within the fund and also by the increase in the fund's
value by the time you sell. Markets move in cycles and the value of your
fund will fluctuate with these movements. Your return can also be negative
if you sell the fund at a unit price less than you paid.
Do not be spooked by short term market drops and sell
your funds. Always consider why you purchased the fund in the first place.
If your objectives are still the same and the fundamentals of the fund
are still the same, consider adding to your position as the fund is now
"on sale."
The financial sections of newspapers usually list the average annual compound
rates of return, for funds which are based on the assumption that all
the income earned has been reinvested.
Do not however, consider just the historical rates
of return. You must also consider market directions, management styles
and the portfolio selection of various funds to ensure they match your
investment temperament
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© , Fiscal Agents Money Management Newsletter
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