Understanding Mutual Funds

• Mutual funds can be structured as closed-end or open-end.

Closed-End Funds

• Have a fixed number of units issued through an IPO.
• Subsequent buy or sell transactions of units occur through a secondary market.

Open-End Funds

• Are offered continuously with no restriction on the number of units.
• Subsequent buy or sell transactions occur through the investment fund manager.

Benefits of Mutual Funds

• Liquidity: Can be sold and converted to cash quickly, usually within two to three business days.
• Professional management: Investors benefit from trained investment professionals.
• Diversification: Reduce risk by holding different types of securities from numerous issuers, and securities vary across sectors and regions.
• Low cost: Expenses are shared among thousands of investors, making it affordable.
• Convenience: Investment fund managers improve customer service offerings for easy investor access.

Mutual Fund Categories

• The CIFSC sets the standards to classify mutual funds based on their investment mandate and securities.

Types of Income

• Includes interest, Canadian dividends, capital gains, and foreign non-business income.

Mutual Fund Types Summary

• Money Market Funds
  • Invest in money market securities with the objective of safety and income.
  • Provides interest, classified as low risk.
• Fixed Income Funds
  • Invest in bonds with the objective of steady income.
  • Distributes interest and some capital gains, classified as low to medium risk.
• Balanced Funds
  • Invest in equities and bonds with strategic asset allocation for income and long-term growth.
  • Pays interest, dividends, and some capital gains, classified as low to medium risk.
• Equity Funds
  • Invest in equity, Canadian dividend, global equity, and international equity sectors for income and long-term growth.
  • Offers interest, dividends, and potentially some capital gains, with a higher risk profile.
• Specialty Funds
  • Includes Labour Sponsored Investment Funds (LSIFs), real property, and commodity pools.
  • Aims for long-term growth through investments in equities, real estate, commodities and other markets, classified as high risk.

Risk Classification

• Risk increases from cash, money market funds, fixed income funds, balanced funds, equity funds, to specialty funds.

Conservative Mutual Funds

• Designed to provide stability and income.

Fund Types and Features

• Money Market Funds
  • Provide a safe, temporary place for depositing money.
  • Invest in low-risk, high-quality fixed income securities with terms of less than 1 year, and pay interest monthly.
  • Offer protection of principal and income.
• Mortgage Funds
  • A fixed-income fund that invests in mortgage securities and some short-term bonds.
  • Combines principal repayment and interest.
  • Offer regular monthly income with low risk
• Bond Funds
  • Consist of bonds classified by issuer creditworthiness and average term to maturity.
  • Offer stable income, classified as low to medium risk
• Balanced Funds
  • Fixed allocation of assets investing in a mix of equities and bonds.
  • Offer portfolio stability and income; equities provide dividends and long-term growth.
  • Offer common shares and bonds, and stable income classified as low to medium risk
• Tactical Asset Allocation Funds
  • Invest in a mix of equities and bonds with unrestricted allocation.
  • Provide income and growth through bond and stock dividends.
  • Common shares and bonds offering income and low to medium risk
• Target Date Funds
  • Focus on a specific date intended to meet a specific life event.
  • Clients can allocate and re-balance, shares and bonds, classified as low to medium risk

Growth-Oriented Mutual Funds

• Seek to maximize capital appreciation.

Fund Types

• Equity Funds
  • Invest in common shares of corporations, which may focus on sectors or regions.
  • Hold common shares and preferred shares, higher risk tolerance with a longer time horizon.
  • Classified as medium to high risk.
• Canadian Dividend Funds
  • Invest in Canadian corporations that pay dividends.
  • Common and preferred shares in Canadian firms, tax-preferred income, and some long-term growth.
  • Classified as medium risk.
• Canadian Equity Funds
  • Invest primarily in securities of Canadian companies
  • Common shares of Canadian companies focused on long-term growth.
  • Classified as medium to high risk
• Global Equity Funds
  • Invest in securities throughout the world, in any country or region.
  • Foreign, Canadian, and U.S. companies.
  • Aims for diversification and growth, classified as medium to high risk
• International Equity Funds
  • Invest in securities of corporations based outside of North America.
  • Common shares of foreign companies; to add international investments to existing portfolios.
  • Classified as medium to high risk
• Sector Funds
  • Focus on a narrow investment sector, such as industry, business, region, or country.
  • Aims for high-risk tolerance with extended investment horizons.
  • Classified as medium to high risk.
• Labour-Sponsored Funds
  • Provide venture capital to Canadian start-ups in exchange for ownership shares.
  • Shares in small to mid-sized Canadian start-ups offer possibility of high return with tax benefits
  • Classified as high risk.
• Real Property Funds
  • Invest in real estate properties, with returns from rental income and capital gains based on appraisal values.
  • Residential, commercial, or industrial properties, those wanting exposure to the real-estate sector.
  • Classified as high risk
• Commodity Pool Funds
  • Invest in specified derivatives and physical commodities beyond regular limits.
  • Options, commodity futures, and forward contracts, are only suitable for sophisticated investors who understand and accept the risks.
  • Classified as high risk.

Index Funds

• The investment mandate is based on a specific market index.
• Aims to replicate the index's performance and return.
• Risk classification depends on the securities held in the portfolio.

Fund of Funds

• Also known as a wrap fund or a managed portfolio solution.
• Offers a pre-set diversified portfolio.
• Portfolio is automatically rebalanced.
• Risk depends on the securities held, benefits from the expertise of multiple portfolio managers.
• Subject to multiple fees.

Exchange Traded Funds (ETFs)

• Use a passive management style.
• Traded on the stock exchange during trading hours.
• Low Management Expense Ratios (MERs) result in low costs, but broker commissions apply when buying or selling.
• Tracking error means ETF returns won’t exactly match the underlying index.

Principal Protected Notes

• Debt instruments issued by trustworthy financial institutions.
• Do not provide a fixed coupon rate.
• Instrument performance is linked and based on that of an underlying asset, e.g., market index.

Pooled Funds

• Investor monies are pooled and structured as unit trusts.
• Managed by professional portfolio managers with a variety of investment options.
• Offer liquidity through redemptions.
• Exempted from filing prospectuses; only available to accredited investors with minimum investment amounts.
• Economies of scale result in lower management fees.

Hedge Funds

• Privately distributed funds, broadly mandated and exempt from filing prospectuses
• Aim to generate positive returns regardless of market conditions.
• Managers use high-risk strategies like leverage and short selling to maximize returns.
• Available only to accredited investors.

Income Trusts

• Invest exclusively in one or more operating companies.
• Objective of distributing cash flow to unitholders.
• Underlying companies usually offer consistent income from interest, lease payments, or royalties, passed through to unitholders.

Segregated Funds

• Also referred to as individual variable insurance contracts (IVICs).
• Suited for investors focused on growth from equities with full or partial principal protection.
• Can only be sold by insurance agents.
• Both capital losses and capital gains can flow to investors, they offer creditor insurance.
• Guarantee a minimum return of 75% of the principal at maturity, or death of the contracted holder.