A mutual fund in Canada is a particular type of managed investment vehicle which is overseen by a fund manager. It is closely related to another common type of investment, stocks. A mutual fund is a bundle of stocks, and when you buy into a mutual fund, you own a piece of the basket, rather than directly owning the stocks themselves. Today, we’ll take a deeper look into mutual funds and how they might fit into your investment portfolio.
What is a mutual fund?
A mutual fund is great investment vehicle which by its nature, has a built-in diversification function. Most financial advisors and investment managers will tell you that having a robust, diversified investment portfolio will be the key for a great financial future.
A mutual fund in Canada is closely linked to stocks, in that mutual funds are a basket, or bundle, of many different stocks. Why is this important? Well, we know that it’s important to have a diversified financial portfolio which can withstand volatility in the stock market. Naturally, because of this idea, many people will want to invest in not one, but many different companies. However, this can be very tough to do, because trying to diversify to many stocks, up to hundreds of different companies, can be very costly.
By investing into a mutual fund, which is comprised of many people gathering their money together, individual investors are able to own one piece of the “basket”, and are able to partake in the performance of up to hundreds of different companies in the stock market.
How does mutual funds work in Canada?
In Canada, a mutual fund itself is managed by a fund manager, who often has a team working with them. If you take a look at your bank, or any other financial institution, you’ll discover that there are hundreds of mutual funds available for your choosing in Canada. Each of these funds have a fund manager, and their job is to make the fund perform as well as possible.
A mutual fund in Canada can have various different focuses: for example, you might see a mutual fund which is focused on the healthcare industry. In this mutual fund, the fund manager would look for the best performing healthcare companies listed on the stock exchange. On a daily basis, the fund manager and their team would seek to buy or sell different stocks to keep the performance of the fund up.
Of course, the mutual fund management team will have a fee, which is commonly called the management fee, or the management expense ratio (MER) for their services. This is something that needs to be considered when you decide to investment into any particular mutual fund.
Are mutual funds a good investment in Canada?
For a lot of people in Canada, mutual funds are one of their first forays into the investment world. The great thing about mutual funds is that there is an incredibly wide variety of them. From low risk bond funds, to aggressive growth-based funds, and everything in between. No matter what kind of risk portfolio you belong to, you’ll be able to find something in Canada that’s within your risk tolerance.
Another reason to invest in mutual funds would be if you were more of a hand-off type investor. Because of mutual funds having a management team actively managing your money, you’ll be able to sit back and allow the professionals to do their job. The flip-side of this, is that this management comes with a price. Before you decide to invest into any particular mutual fund in Canada, make sure you understand what fees are charged by the fund, and look at the performance history, net of fees!
How does a mutual fund work in USA?
A mutual fund in the USA works very similarly to mutual funds in Canada. As a Canadian, you do have access to US mutual funds, but it’s not recommended for you to invest in them as there are a lot of complicated tax implications for cross-border investing. However, you’re not missing out on anything as the structure of mutual funds in the USA is the same as mutual funds in Canada. Both have fund managers, and both have up to hundreds of companies’ stocks.
A good compromise, if you want to access US companies, is use mutual funds in Canada which hold US companies.
Types of mutual funds
There are many types of mutual funds. We will list a few below, but keep in mind that there are many more types to choose from!
Index funds are mutual funds which tracks a specific index like the S&P 500 or the NASDAQ. Whichever companies make up that index, that’s what the mutual fund will invest into.
Regional funds are mutual funds which are focused on a specific geographical region. For example, you might see a western Europe fund, South America fund, or East Africa fund. As the name suggests, the fund will focus on companies based in those regions.
Resource funds are mutual funds that focus on a particular resource such as crude oil, precious metals, or even commodities like wheat. These funds will focus on companies associated with those particular resources.
Sector funds are mutual funds that are focused on a particular industry such as healthcare, technology, or finance, as an example. As the name suggests, these funds will invest in companies specializing in one particular sector.