Read Our Finance Blog
Uncategorized

Guide to Investing in Mutual Funds in Canada

A mutual fund is a financial instrument, which is often referred to as a group of financial assets like ETFs. stocks. Bonds. Cash, mutual funds, and other such investment assets are under the ownership of the investors and have a fund manager that manages them on the investor’s behalf. They are a popular investment option since you can invest in multiple assets without having to buy each one of them. Consider this article as your guide to investing in mutual funds in Canada! 

Mutual funds fulfill the goal of a diversified portfolio. In the new era where millennials have been especially attracted towards investing in ETFs (Exchange-traded funds), mutual funds have seen a significant outflow of funds over the years. As per a survey in 2020, Canadians alone hold a total of $1.78 trillion in the form of mutual funds. And ETFs are not valued at $257 billion here. Without any further wait, let’s get into the nitty-gritty of mutual funds in Canada. 

Read: Your Guide On How To Invest In An ETF In Canada?

Various Types of Mutual Funds in Canada

Mutual funds are of different types that serve the needs of investors. It can be based on risk tolerance, the volume of funds, time horizon, goals of investment, strategies, income, preservation, and capital growth.

The various types of mutual funds that exist in the market are as follows.

Mutual Funds in Canada

Fixed-Income Funds

Through these funds, you can invest in corporate or government bonds, mortgage funds, and dividend funds. These funds come with an attractive opportunity for investors that allows them to create a stream of income that is unwavering and helps preserve the capital. 

You need a low tolerance for this alternative as opposed to the equity funds, the returns tend to be more than the funds in the money market. 

Read: Avoid These Biases for Making Investment Decisions in Canada!

Money-market Funds

Money market funds are short-term financial assets with high liquidity. Hence, you can invest in assets that have a term of little less or more than 1 year. These include commercial bills, treasury bills, and bankers’ acceptances with a low-risk degree.

These are ideal for the investors that have the goal to preserve capital, fulfill a short-term goal, invest in high liquidity short-term assets, and earn high-interest rates to get a steady income. 

These instruments have a low-risk degree but also have lower returns than an equity fund at the same time. 

Read: Leading Bank Accounts for Students in Canada (2022)

Equity Funds

These are some of the popular mutual funds in Canada. Through these funds, one can invest in shares of the public companies whose shares are open for the public in Canada, or internationally. On the assessment of the investment strategy, you can invest in small-to-medium capitalization companies, specific sectors, blue-chip companies, value companies, etc. 

These funds are a good source for capital appreciation and have a significant potential for good returns on your business than the other types. Stocks have a high-risk degree and hence, you need a high-risk tolerance for it. If your mutual fund is aggressive and growth-oriented, you will also bear the high risk with high returns. 

Read: How to Buy Stocks in Canada: The Ultimate Beginner’s Guide

Balanced Funds

These funds allow investing in a combination of instruments, including money-market assets and fixed-income assets. Investors with both goals of income and growth potential can invest in it. 

The ratio for any balanced fund for the fixed income/money market is 40:60 to 60:40. Based on market conditions and the objective of the fund, the manager can switch to different weightings as and when required. It helps to create a diversified portfolio with better safety, capital appreciation, and income. 

Read: GIC vs. Mutual Funds – Which One is Best for You?

How Do Mutual Funds Function?

Mutual funds group a stack of money from various investors who are part owners of the portfolio based on the capital that they invest. The investments held by a mutual fund are managed professionally by a fund manager who regulates the investment according to the goals and strategies. 

The archaic mutual funds are open-ended and any rookie or new investor is free to buy the new units or shares as more money inflow goes there. The consolidated unit or shares are calculated at the end of every business day and are also called the NAV (Net Asset Value). The cost per unit depends on the individual assets that are held by the mutual fund. The NAV of mutual funds is also calculated by the outstanding units/shares. 

NAV per unit is defined as the price which the investors pay to become a holder of the units in the mutual fund and what the current owners will get if they sell, switch, or redeem their units. 

Read: Creative Side Hustles in Canada to Increase Your Earnings in 2022

Net Asset Value, Interpretation

Suppose a mutual fund with $500 million, $50 million liabilities, and $20 million shares.

NAV = (asset – liabilities) = ($500 – $50) = $4500 million

NAV per unit = $450 million / 20 million units = $22.5

When the value of assets increases or decreases, so will the NAV.

Why Should You Invest in Mutual Funds in Canada?

Mutual Funds in Canada

Mutual funds bring the prospect to invest in assets that might be out of the affordability of an investor otherwise. It also has several other benefits that are:

Professionally Managed

By investing in mutual funds, you get the chance to access the global mutual funds market via people who are proficient in research, selecting an investment, selling, buying, and rebalancing as needed. Investors who lack the knowledge, time, money, confidence, how-to DIY their investment with a hands-off approach that the mutual funds require. 

The managers usually always have the goal to stay one step ahead of the market, but achieving this is not always possible.

Read: Great Deals on Bank Accounts for Newcomers in Canada

Diversification

Diversifying your portfolio is possible through mutual funds in Canada. They are already diversified with assets across different categories, regions, industries, sectors. Diversification helps to decrease the investment risk while getting more returns.

Liquidity

Mutual funds are liquid and you can buy and sell them in the market with liberty. If you want to chase them out, the money will be deposited back in your account promptly. 

Flexibility and Variety 

Investors can choose from a bunch of mutual funds. They can choose as per their risk tolerance, objectives, expected returns, and select the ones that are ideal for their needs. 

Read: What are GICs in Canada?

Less Initial and Continuous Investment

You only need a small investment to indulge in some units of a mutual fund. You do not need more than $500 to start investing in mutual funds. Many mutual funds allow the periodic purchase through a decided pre-authorized plan that further regulates your money and helps to purchase the mutual fund as lower than $25 on each fund. 

Series and Classes of Mutual Funds

Mutual fund companies refer to their mutual funds with letters to define different series for investors with different targets and fee structures. There is no uniformity in the letter designation and it is different from company to company. For reference, some of these designations are:

Series A

This is usually reserved for the retail investors (who invest daily) and the person selling it is a financial advisor. They are accompanied by a back-end load and trailing fees for advisors. 

Series B & C

This series is not very common but the same as the Series A mutual funds. They also have a back-end load (or deferred sales charge) which is foregone if the funds stay in the custody of the investor for long. For example more than 1 year.

Read: Amazing Investment Options in Canada to Grow Your Money

Series D

These funds are designed for investors who purchase or DIY their investment via the brokerage account and do not look for any tailored advice from professional managers or advisors. D-series mutual funds have lower MERs and an almost negligible trailer fee. 

Series F

The fee for financial advisors is segregated in this kind of series, with the  Management expense ratio which is levied upon the fund. The MER for this series is also low because there is no trailer pee for the advisor. 

Series T

The goal of this series is to give tax efficiency to the investor and spread steady cash flow with the capital return. ROC or return on capital lowers the adjusted cost base that you had with your investment. 

Series I

This series is reserved for institutional investors or individuals with high net worth. However, remember that the alphabets have varied designations. For example, TD bank utilizes ‘I’ to define investors in the mutual funds for retail investors, which is the translation for ‘Series A’ by many banks. 

Read: 22 Finance Terms You Should Know in 2022!

Fees of Mutual Funds

The fees for mutual funds are of different kinds. These include sales commission (or load), trading fees, Management expense ratio (MER).

Management Expense Ratio

This fee is significant in mutual fund investment. This fee constitutes the operating and management fee. The management fee is given to the fund manager along with the trailing fee for the financial advisors for the advice that they give to the clients. 

The MER in Canada is at an average and up to 2.35%. If your fund is complex and requires active management, this fee will be higher. MER is subtracted from the funds of your mutual fund and also has an impact on the total return that you get. 

Loads or Sales Commission

You have to pay a fee while purchasing or selling a mutual fund that you hold or want to buy. Commissions are calculated along with the initial sales charge or front-end load. Or you might have to pay this fee when you sell. It is also called deferred sales charge or back end load. 

Such charges are an extra that adds to your investment cost and will lower down the investment that you make. For instance- If you invest $10,000 in a mutual fund with a front-end load of 3%, you will pay $300 as commissions, and $9,700 will go towards your purchase of the asset.

Read: Top 10 Investment Rules To Follow In Canada!

Additional Trading Costs

If you redeem or try to switch your funds within a short period, or open/close an account, you will have to pay an additional fee. 

Investing is not an expensive affair. Platforms like Wealthsimple provide investing opportunities at fees as low as 0.4%. They also give a $75 bonus to the investors.

How to Invest in Mutual Funds in Canada?

Investing in mutual funds is not a burdening task. Although, you will not find them at exchange platforms as you do for the ETFs or stocks. You can get a mutual fund from the credit union, bank, mutual fund dealers, and almost all the financial institutions. 

Every mutual fund comes along with a prospectus that lines the objectives, fund managers, fund’s holdings, etc. This crucial information helps the investors to decide if they want to buy the mutual fund or not. 

You can invest in mutual funds with a registered account of RRSP, TFSA, RRIF, and RESP or other non-registered accounts. 

Returns and Taxations of Mutual Funds

The main source of earning money through mutual funds is the income and capital gains distribution. The income distribution comprises dividends and interest. The capital gains are acquired when you sell your fund at a rate more than the price that you paid to buy it for. If the price per unit falls, then you will suffer a capital loss. 

The taxes that are due on your mutual fund are dependent on where you hold it. Whether it is a registered or non-registered account. In a registered account, your returns on mutual funds are not taxed unless you withdraw them. While, for a TFSA, they are never taxed. 

Read: How to Save Money During Holidays in Canada?

Risks Associated with Investing in Mutual Funds 

Every investment is accompanied by some degree of risk. Similarly, mutual funds also come with risks. These risks include the interest rate risk, liquidity risk,  credit risk, market risk, etc. Mutual funds are not insured against any losses that you suffer from any trading activity, falling market, poor investment decisions and advice, fraud, or market downturns. 

In case your mutual fund dealer or brokerage goes bankrupt, the insurance assets that you have are insured for up to $1 million by the CIPF or the (Canadian Investor Protection Fund) or Mutual Fund Dealers Association (MFDA). So, there is a risk but the final decision of making your investment is based on your risk appetite. I hope this article helped you understand mutual funds in Canada and ways to invest in them. Let us know in the comments. 

The Bottom Line

Before investing in any equity tools such as mutual funds, as mentioned above, you need to know the risk associated. Along with that, it is always a good idea to diversify your portfolio by including other asset types such as bonds, fixed deposits, gold – anything that can reduce your overall risk. Also, make sure that your portfolio is aligned with your goals. That’s it, and you are good to go!

Read: What You Need to Know About Mortgage Broker Commission?


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

Leave a Reply

Your email address will not be published.

About YourFirst.ca

YourFirst.ca is your trusted resource to find simple Canadian financial advice for Your First everything! Buying your first home, applying for your first mortgage, or making your first investment should not be that difficult. Learn more about us:

Learn More About Us
Blog Categories
Read Our Blog
Cart Overview