Mutual Fund Essentials
When it comes to investing, knowledge is power. Take the time to familiarize yourself with mutual fund basics and the wide selection of available funds before making investment decisions.
- What is a Mutual Fund?
- Types of Funds
- Your Investment Options
- How to Choose Mutual Funds
- Planning and Research
- Mutual Funds and Risk
- How Distributions Work
- Taxes and Your Funds
What is a Mutual Fund?
A mutual fund is an investment that pools your money with that of other investors to purchase a portfolio of individual investments. The mutual fund units you buy represent your share of the fund’s investment portfolio.
Each fund is managed according to its investment objectives. Mutual funds offer many advantages, including:
- Ease of investing.
- Professional management by investment experts.
- A wide selection of investments to meet all your needs.
- Diversification potential to maximize return potential and manage risk.
- The ability to buy and sell most funds on any business day.
Types of Funds
Mutual funds come in many varieities. A wide range of investment possibilities means you can find individual funds or a combination of funds to meet any investment need. Here are the main fund types:
Security Funds
These funds help you preserve the wealth you’ve worked hard to build, at the same time providing a modest level of income. They offer safety of principal, regular income payments and easy access to money should you need it. Money market funds are typical security funds.
Income Funds
These are ideal if you want your money to generate income. Income funds typically invest in bonds, mortgages and other fixed income securities. The level of income and risk depend on the characteristics of investments in the fund’s portfolio.
Growth Funds
Growth funds provide potential for higher long-term returns, often by investing in stocks. They range from relatively conservative equity funds that specialize in high quality Canadian “blue chip” stocks to funds that invest in major global stock markets. It’s important to remember that higher growth potential may entail greater risk.
Aggressive Growth Funds
Maximize return potential with aggressive growth funds that invest in specific market sectors or emerging economies with greater growth potential. These may entail greater risk than conventional growth funds.
U.S. Dollar Funds
These funds invest in U.S. dollars and provide your portfolio with diversified currency exposure and an opportunity to benefit from the return potential of U.S. markets and U.S. dollar denominated investments.
Managed Programs
These ready-made portfolios combine a number of mutual funds to provide a one-stop diversified portfolio that reflects your financial goals, investment horizon and/or risk tolerance. These funds are regularly monitored to ensure that they meet their investment objectives in changing market conditions.
Your Investment Options
BMO offers a full range of fund choices. Whether you intend to invest in just one fund, put together a diversified portfolio of individual funds or make a one-stop investment in a diversified managed program, we have everything you require.
How to Choose Mutual Funds
With so much choice, where do you start? It’s not complicated. Here are some simple steps to get you going:
- Carefully research fund possibilities. You’ll make better informed investment decisions.
- Discover what level of risk you’re comfortable with.
- Know the investment and taxation basics of mutual funds.
- Choose funds according to your investment plan.
Our Investor Profiler can help with your mutual fund choices.
Planning and Research
Two elements can be called key to mutual fund investment success: planning and research.
Have your financial plan in place before you start, and research the wide range of BMO fund possibilities so the investments you choose reflect your objectives.
Mutual Funds and Risk
When it comes to investing, risk is a fact of life. But risk can be managed. You can choose low-risk, “conservative” income-oriented investments or take on more risk through growth investments that offer higher return potential.
Think about how to balance your goals with the degree of risk you’re comfortable with.
How Distributions Work
There’s more to mutual funds returns than unit prices. Funds also make cash distributions that enhance returns. These can be automatically reinvested in additional fund units or received as cash payments.
Depending on the type of fund, distributions may be made monthly, quarterly or yearly.
Taxes and Your Funds
Take the time to understand how taxes affect your investments. Taxes determine how much goes into your pocket after the government takes its share of investment profits. Consider these essential tax facts.
- You could be liable for capital gains income taxes when you realize a profit on fund units.
- Fund distributions are taxable. How much tax you pay will depend on the type of fund distribution and your marginal tax rate.
- Investment growth is sheltered from tax inside a registered investment such as an RSP, RIF, RESP or TFSA.
