Investing in Mutual Funds

Investing in Mutual Funds

• Mutual funds pool money from various investors to buy stocks, bonds, and other securities
• Professional managers working for investment companies select these securities
• Each investor owns a proportional share of the assets and any income the fund generates
• Many individuals opt for mutual funds as part of their retirement savings strategy

Professional Management

• Professional management is a key aspect to consider
• It is important to know who the fund's manager is

Diversification

• Diversification includes asset classes like stocks, bonds, and other securities

Investment Company

• An investment company is a firm managing pooled funds from small investors in appropriate securities

Mutual Fund Characteristics: Closed-End Funds

• Closed-end funds have a fixed size
• Investment companies issue shares only during the initial setup
• You can purchase shares from current investors after the initial offering

Mutual Fund Characteristics: Open-End Funds

• Open-end funds issue and redeem shares at investor's request
• Investors can buy and sell at the net asset value

Net Asset Value (NAV)

• NAV is the current market value of the fund's portfolio minus liabilities per outstanding share
• Calculated daily at the close of trading

Net Asset Value Example

• The ABC Canadian Income Fund possesses investments with a $124 million market value and $4 million in liabilities
• If there are 6 million shares outstanding, the net asset value calculates to: ($124 million - $4 million) / 6 million shares = $20 per share

Mutual Fund Characteristics: Index Funds

• Index funds enable investors to invest in a diversified basket of securities affordably
• Constructed to mirror market indexes such as the S&P 500 or the S&P/TSX Composite

Mutual Fund Characteristics: Exchange Traded Funds (ETFs)

• ETFs allows affordable investment in a diversified basket of securities
• ETFs provide diversification with stock flexibility

Short Sell

• Short selling involves selling borrowed stock, hoping the price decreases before repurchasing

T-Series Mutual Funds

• T-series mutual funds cater towards investors seeking tax-efficient income without capital gains trading
• The "T" stands for tax, as these funds focus on return of capital (ROC) distributions that aren't immediately taxed

Load Funds

• Load funds charge a commission when investors buy or sell shares

No-Load Funds

• No-load funds do not have sales charges

Front-End Load

• Front-end load includes a sales fee with each purchase, reducing invested funds

Back-End Load

• Back-end loads are also called contingent deferred sales loads

Management Expense Ratio (MER)

• MER is a fixed percentage of the fund's total value

Special Fees

• Special fees include annual RRSP, RRIF, RESP trustee fees, account setup, short-term trading, processing, and service fees

Load fund Fees

• The load fund has a front-end or back-end sales charge

No-load fund Fees

• The No-load fund has no sales charge

Front-end load Fees

• The front-end load includes a sales fee charged with each purchase that reduces invested funds
• Companies lowered the maximum front-end load on their funds to around 6 percent

Back-end load Fees

• The back-end load is referred to as a contingent deferred sales load
• One to six percent of withdrawals on a sliding scale decreasing with time held, then zero if selling after a set number of years happens with back-end loads

Management fee Fees

• The management fee is a fixed percentage of the fund's total value, called the management expense ratio (MER)
• The management fee ranges from 0.25 percent (rare) to 4 percent, to cover the investment company's costs
• The management fee can be up to 0.5

Mutual Funds by Investment Objective

• Mutual funds are specifically tailored to meet the investment goals of their customers
• These can be money market, mortgage, bond, dividend, balanced/asset allocation, equity, or specialty funds
• Also included are international/global, real estate, ethical, segregated, and labor-sponsored venture capital corporations

Family of Funds

• Many companies allow investors to switch among funds to improve potential returns and security

Steps for Buying or Selling Mutual Funds

• Performing a financial checkup, obtaining the necessary funds, determining investment objectives, and finding a fund that matches goals must be done
• Evaluating the mutual fund before buying or selling, too

Reading the Mutual Funds Section

• Items to monitor are net asset value, asset value change, company and fund name, fund objective, total return, and ranking among funds
• Sale load, knowing whether this exists or doesn't (NL). and annual average net expenses are also key

Mutual Fund Prospectus Includes

• Risk factors, the fund's past performance, the type of investments, information about dividends, distributions, and taxes must be included
• Management information and investment limitations, process to buy and sell shares, service provided and cost, and frequency of portfolio changes are good things to track

Mutual Fund Prospectus Also Includes

• Investment choice, fund objectives, and a summary of fees charged are key to a good prospectus

Other Fund Information

• Mutual fund annual reports outlining performance, investments, assets, and liabilities are good to check
• Financial publications and the internet are also valuable resources to check

Advantages of Mutual Funds

• Diversification, professional management, ease of share transactions, and lower minimum investment sums are advantages
• Multiple withdrawal options, income/capital gains distribution, switching privileges, and included services add advantages

Disadvantages of Mutual Funds

• Purchase/withdrawal costs, ongoing management fees, and potential underperformance are disadvantages
• Inability to control capital gain distributions, high tax-reporting complexities, market risks, and aggressive sales tactics might be issues

Return on Investment

• Returns can come from income dividends, or the earnings a fund pays to shareholders after expenses
• Capital gain distributions that happen through the sale of securities in turn give a return to the fund's shareholder
• Selling shares at a higher price is another way of getting a return on investment

Taxes and Mutual Funds

• Most returns are subject to taxation
• Companies provide a statement specifying received dividends and capital gains
• Although you do not receive cash (as the returns are reinvested) they are still taxable
• It can be taxed in a year when your burden is already heavy
• It may be taxed for the full year-even if you only own part of the year

Purchase Options

• You can do closed-end purchases through the stock exchange
• Open-end, no-load processes can happen directly from the investment company

Reinvestment Plan

• Dividends and capital gains reinvest to buy additional shares

Withdrawal Options

• Selling closed-end funds to another investor and open-end funds to the investment company are both withdrawal options
• Having the shares redeemed at their Net Asset Value is key
• Additionally, specific dollar amount, shares, or percentage withdrawals are all options available