Mutual funds can be an effective way to help you save for important future goals. Mutual funds are a collection of shares, bonds or other types of investments. Different types of mutual funds are available, including money market funds, bond funds, growth or equity funds, and balanced funds, among others. When you buy a mutual fund, you are pooling your money with many other investors. Like all investments, costs and risks are involved.
A mutual fund’s value will change as the value of what it invests in goes up and down. The risk associated with a fund depends on what the fund invests in. Depending on the type of fund, you might receive a distribution of dividends, capital gains, interest or other income types the fund earns on its investments. Most mutual funds will reinvest any earnings to buy more fund units for you. If you would rather receive the earnings in cash, you should talk to your investment professional. It’s important to note that the way you chose to receive the earnings and how you hold the investments (in a registered plan or not) can impact how your earnings are taxed. Details about the costs and the level of risk associated with a particular fund can be found in its Fund Facts document or the simplified prospectus.
You can visit the Canada Revenue Agency’s website to learn more about registered savings plans, and talk to a qualified tax expert about how your investment choices may impact your taxes.
Mutual funds are widely available through investment firms, fund companies and financial institutions. Costs and fees are associated with every fund, although they can vary. You may pay for administrative costs, management fees, or fees when you buy or sell a fund. It is important to understand not only what the costs and fees are, but also how they are paid and how they affect your return. For example, you don’t pay management fees or administrative costs directly, the fund pays these fees. But these fees reduce the fund’s returns – what you get on your investment.
Most funds are offered in different series or classes, usually for different types of investors. The fees and expenses will be different for each series. Your investment professional can explain which series or class may be most suitable for you.
Brochure: Understanding Mutual Funds
Exchange Traded Funds (ETFs)
ETFs are a collection of shares, bonds, commodities or other types of investments. They are traded on the stock market and are bought and sold similar to stocks. Like a mutual fund, an ETF allows you to diversify your portfolio. Typically, they follow an index, like the Toronto Stock Exchange, and are priced continuously throughout the day in real time. An ETF’s value and level of risk depends on and changes based on what the fund invests in. They are attractive to retail investors because of their low cost, diversification and share-like features, but some types are riskier than others.
Depending on what the fund invests in, you may receive a distribution of dividends, interest or capital gains. Unlike many mutual funds, ETFs do not reinvest your distributions in more fund shares or units. Generally, you have to instruct the investment firm in how you want to invest these earnings.
Earnings from ETFs are taxable. It’s important to note that the way you chose to receive the earnings and how you hold the investments (in a registered plan or not) can impact how your earnings are taxed. You can visit the Canada Revenue Agency’s website to learn more about registered savings plans, and talk to a qualified tax expert about how your investment choices may impact your taxes.
Leveraged ETFs are different from most ETFs. These ETFs use a strategy that uses borrowed money to increase the amount they can invest in the market to try to increase the potential return of an investment. Because of this, they carry additional risks than other ETFs. While potential gains are multiplied when the index goes up, so too are your losses if the index goes down. Leveraged ETFs are highly speculative, short-term investments.
You can usually buy and sell ETFs on a stock exchange, similar to buying stocks. Typically, you pay commissions and management fees to invest in ETFs.
Details about the costs and the level of risk associated with a particular ETF can be found in its ETF Facts document. Discuss with your investment professional how these costs and fees impact your returns.
Canadian Securities Administrators ETF Fact page
Hedge funds are professionally managed investment funds that are similar to mutual funds, but tend to be more aggressive, and can use riskier strategies not available to mutual funds. Hedge funds are considered a complex investment that not everyone can invest in and not everyone can sell. Management fees for hedge funds are also quite a bit higher than other types of investment funds and typically include an incentive fee for the fund manager based on the fund’s performance.
As with any investment, it’s important to check the registration of the person or company offering to sell hedge funds before you invest.
Segregated funds are an investment product sold by life insurance companies. Segregated funds are similar to mutual funds; however, segregated funds provide a protection on your money that mutual funds do not. Even if the fund loses money, a portion of the money you invest is guaranteed (75%-100%). For this guarantee to apply, however, you have to maintain your investment for a certain period of time. Segregated funds tend to have higher fees than mutual funds, and only insurance advisors or investment professionals who are licensed to sell insurance can sell segregated funds.