Understanding Mutual Funds

Introduction to Mutual Funds

• The concept of mutual funds dates back to the late 1700s
• The first open-end mutual fund was created in the U.S. in 1924
• The first mutual fund in Canada was established in 1932

Benefits of Mutual Funds

• Liquidity: Mutual funds are easily converted to cash
• Professional Management: They are managed by trained professionals
• Diversification: Risk is reduced by holding various securities
• Low Cost: Expenses are shared among many investors
• Convenience: Mutual funds offer easy access and management

Closed-End vs. Open-End Mutual Funds

• Closed-End funds have a fixed number of units traded on secondary markets
• Open-End funds are continuously issued and redeemed by the fund manager

Mutual Fund Categories

• The Canadian Investment Funds Standards Committee (CIFSC) classifies mutual funds based on investment mandates and securities held

Major Fund Types

• Money Market Funds: Low-risk, short-term securities
• Fixed Income Funds: Bonds and mortgage securities
• Balanced Funds: Mix of equities and bonds
• Equity Funds: Primarily equities for long-term growth
• Specialty Funds: Focus on specific sectors or strategies

Income Types

• Include interest, dividends, capital gains, foreign income, and return of capital

Risk-Return relationship

• Conservative funds offer lower risk and lower return
• Growth-oriented funds offer higher risk and higher return

Conservative Mutual Funds

• Money Market Funds invest in short-term, high-quality securities and have low risk and low return
• Mortgage Funds invest in mortgage securities, offering steady income
• Bond Funds invest in bonds, with returns influenced by interest rates
• Balanced Funds are a mix of equities and bonds for income and growth
• Tactical Asset Allocation Funds offer flexible asset allocation based on market conditions

Target Date Funds

• Adjust asset mix over time, reducing risk as the target date approaches

Growth-Oriented Mutual Funds

• Equity Funds invest in common shares for long-term growth

Canadian Dividend Funds

• Focus on dividend-paying Canadian companies

Global/International Equity Funds

• Invest in foreign markets, with higher risk due to currency and political factors

Sector Funds

• Concentrate on specific industries or sectors

Specialty Funds

• Labour-Sponsored Investment Funds (LSIFs) invest in Canadian start-ups, with tax credits
• Real Property Funds invest in real estate, offering income and capital gains
• Commodity Pools invest in derivatives and physical commodities, with high risk

Index Funds

• Track specific market indices and are low cost

Fund of Funds (FOF)

• Invest in a basket of mutual funds, offering diversification and automatic rebalancing

Other Investment Products and Investment Funds

• Exchange-Traded Funds (ETFs): Trade on stock exchanges, are low cost, and track indices
• Principal Protected Notes (PPNs): Guarantee principal repayment, with returns linked to underlying assets
• Pooled Funds: Similar to mutual funds but for accredited investors, with no prospectus requirement
• Hedge Funds: Aim for positive returns in all market conditions, using alternative strategies like leverage and short selling
• Income Trusts: Distribute cash flow from operating companies, subject to corporate tax since 2006
• Segregated Funds: Insurance-based investment products with principal guarantees, higher fees, and creditor protection