In spite of the controversy that surrounds mutual funds these days, they remain a principal source of investments for most Canadians, and for good reason. They can offer an attractive way to hold a broad range of investments. However, as with all investments, you need to know exactly what you are buying and what the true costs are. Here are a few basic things to keep in mind.
HOW do Mutual Funds Work?
A mutual fund lets you invest in a group of stocks, bonds or cash investments picked by a professional fund manager. Essentially, you pool your money with a lot of other investors to buy units, or shares of a mutual fund. Some people mistakenly assume mutual funds are higher risk investments, but that isn’t necessarily the case. The risk associated with any mutual fund is determined by the investments in the fund, therefore they can be low, medium or high risk. And whether you are looking for safety, income or growth from your investment, you can likely find a mutual fund to fit your needs.
Your fortunes are, however tied to the skill and experience of the fund manager who buys and sells the investments at the core of the fund – and, of course, to the markets in general. Look at your fund manager’s track record, but remember that a great past performance does not necessarily guarantee future success.
1) Affordability. You can invest as little as $25 or $50 a month.
2) Convenience: You can make monthly contributions and you can buy mutual funds through most financial institutions.
3) Diversification: The risk is spread over more investments than the average person can reasonably hold.
4) Expertise: The investments in the fund are chosen by professionals who can do more extensive research and analysis than most individual investors.
5) Disclosure: Stringent regulations outline how mutual funds must be set up and managed, and how investors are informed. Before you invest you will be given a document called a prospectus which itemizes fees and lists the investments in the mutual fund.
6) Flexibility: You can easily buy and sell your units in a mutual fund. You aren’t locked in (although there may be redemption charges to sell your investments – ask before investing).
7) International Investments: It can be difficult for the average investor to buy stocks and bonds outside of Canada (with the exception of the US). Mutual funds make it easy.
Are Mutual Funds for Everyone?
The short answer is, no. There are other options including: ETFs and index funds, buying individual stocks and bonds, gold or real estate.
Before making your choice, you need to know how involved you want to be in investment decisions, how much you have to invest, how rates of return are reported to you, and fees associated with your investment options. This is the time to do some homework.
Certainly you can get some expert advice, but keep in mind that most financial advisors are also commissioned sales people and every investor is ultimately responsible for their own investments. Remember, “Delegate – Don’t Abdicate” responsibility for your money.