These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
I will often get asked by people to invest in ‘Mutual Funds’ or they’ve heard that ‘Mutual Funds’ are ‘bad’ investments. I think there’s much confusion regarding what a Mutual Fund is. Investing in Mutual Funds is simply a ‘way’ to invest, an investment method. A Mutual Fund itself is not an investment. Mutual Funds can be held in registered (ie RRSP, TFSA, RESP, RRIF) accounts or non-registered accounts.
There are many different types of investments held within Mutual Funds and many different investment management styles with Mutual Funds, so it’s important to understand what you are purchasing or getting when investing in a Mutual Fund. Mutual Funds are simply a way to pool/combine your investment monies with others to purchase different types of investments in an economical/cost-effective manner. It’s similar to the concept of ‘bulk buying’ for investments. It is a way that an investor can purchase a basket of investments for a lower cost than if they were to purchase the same investments on an individual basis.
The investment management (deciding which investments to purchase and when to buy and sell) is professional, institutional style management so investors don’t have to try and make the decisions on their own. Professional money managers have access to many tools and company board of directors to make sound investment decisions which individual investors would not.
Each Mutual Fund will have an investment objective/mandate which dictates which investments will be held and how the investments will be managed. Mutual Funds can hold, stocks, bonds, a variety of derivative investments, Money Market investments; to name a few. The percentage of each holding will be dictated by the Fund’s investment objectives. Mutual Funds can be very conservative investments or very volatile investments, depending on the individual fund objectives and holdings.
Mutual Funds will incur management costs which represent their overhead for running the funds (ie salaries, rent, purchasing costs, etc). These costs will vary from Mutual Fund to Mutual Fund and are outlined in the Mutual Fund prospective which should be given to every investor. Mutual Funds are NOT guaranteed investments like a GIC, but many have years of performance history to give an indication of what to expect from a rate of return and volatility perspective. Mutual Funds are regulated by the Mutual Fund Dealers Association which clearly outlines roles and responsibilities.
Given the variety of investment options and investment management styles (there are 1000’s/10,000’s of Mutual Funds) that can be held, it is always best to seek advice from an investment specialist, or Certified Financial Planner to determine which investment mix is best suited for your individual and family objective and your risk tolerances.
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