Mutual Funds

The Canadian mutual fund industry is one of the fastest growing sectors of the Canadian financial industry. Mutual funds are very popular amongst Canadian investors, allowing them to diversify their investment portfolio, while receiving professional investment services.

What is Mutual Fund?

A Mutual Fund is investment vehicle, which raises capital by selling shares of the mutual fund to investors. A Mutual fund can be setup as either corporation or trust (most Canadian Mutual Funds are setup as trusts). Mutual funds are professionally managed, and invest in different asset classes including but not limited to bonds, stocks, money market instruments, precious metals and more. Mutual funds have different investment objectives like capital gains, low-risk investment, high liquidity, etc. You will have to decide for yourself which mutual fund is right for you, depending on your own investment objective.

Types of Mutual Funds

Mutual funds can be divided into several categories depending on the asset class they invest in. The main mutual fund categories are equity mutual funds, bond mutual funds, money market mutual funds, dividend mutual funds, real estate mutual funds and mortgage mutual funds. The money market mutual funds are the lowest risk mutual funds as they invest in short-term government bonds, treasury bills and other money market investment vehicles. The money market mutual funds are very liquid. Bond mutual funds invest in bonds and are riskier compared to the money market funds. The equity mutual funds invest in corporate shares and bear more risk compared to both bond and money market mutual funds.

Mutual funds can be divided in 3 main categories depending on the sales commission that is paid when somebody purchases mutual fund units. The front-end load mutual funds are mutual funds, which incur commission when you purchase mutual fund shares. With the back-end load mutual funds, you pay sales commission when you sell the mutual fund shares. The most popular mutual funds of course are the no-load mutual funds, which do not require paying a sales charge at all.

Mutual Funds Advantages

Mutual funds offer professional investment management while having relatively low cost. This makes mutual funds a good investment vehicle for small investors. Another advantage of mutual funds is the fact that they allow diversification, even with a low level of capital. For example if you believe the price of gold is going higher you can invest in mutual fund(s) investing in precious metal explorers and producers, instead of buying shares in one or two precious metal companies. Another mutual fund advantage worth mentioning is their liquidity.

Mutual Funds Disadvantages

If you are interested in investing in mutual funds, one thing worth considering is the costs associated with this type of investment. The mutual fund cost come in a form of management fees and sales fees. If you choose a no-load mutual fund you won’t have any sales fees, but you cannot avoid mutual fund management fees, because this is how mutual funds make money. Your only choice here is to choose a mutual fund with low management fees.

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