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Mutual Fund Investing Basics

 

A mutual fund is a pool of investments managed by a professional portfolio manager. The portfolio manager invests the money on behalf of a group of investors who have similar investment goals. The fund’s goals are outlined in the fund objectives and how the portfolio manager invests the money to meet the fund’s objective are outlined in the fund’s strategies.

 

Depending on the fund’s investment objective, a mutual fund can invest in stocks, bonds, cash, or other mutual funds or exchange traded funds. BMO Mutual Funds are further categorized as SecurityA category of BMO Mutual Funds that help you preserve wealth, while 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. , IncomeA category of BMO Mutual Funds, these 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. , GrowthA category of BMO Mutual Funds, these 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., Equity GrowthA category of BMO Mutual Funds, these funds maximize return potential through investing in specific market sectors or emerging economies with greater growth potential. These may entail greater risk than conventional growth funds., U.S. Dollar FundsA category of BMO Mutual Funds. These funds invest in U.S. dollars and provide your portfolio with diversified currency exposure. and Managed SolutionsAn investment solution that wraps a mix of underlying mutual funds and/or ETFs into a single portfolio..

 

Mutual Funds provide many benefits, including professional money management and diversification with broad investment options across sectors, asset classes and geographies. They are easy to buy and are also available with low minimum initial investment amounts.


Discover the range of Mutual Fund strategies available to you.

Building a Financial Plan

 

The best approach to achieve your specific investment goals is to build a financial plan. Depending on your personal investment knowledge, it may be a good idea to seek advice from an investment professional. An investment professional will help you to build your personalized, tailored plan and monitor it with you on an on-going basis. Some of the things you will need to think about are what you are saving for, how long you plan to stay invested and your risk tolerance.

 

A plan will help you stay invested and stay focused on your long term goals. See Saving for Retirement and Saving for Education for specific investment strategies related to these goals.

Risk Reward Trade-Off

 

In selecting the mutual funds that best meets your individual needs, you will need to consider the trade-off between risk and returns.

 

The value of a mutual fund can go up or down. Mutual funds are affected by things like changes in interest rates, economic conditions in Canada or around the world or news about companies the fund invests in. How big the fund’s value changes are is a measure of risk. This is called volatility.

 

Investments that have the highest return potential fluctuate more with the market in the short term and have a greater possibility of gaining value over the long term.

 

Diversification is an important investment strategy to help reduce volatility and manage risk.

Prospectus and Fund Facts

 

Every mutual fund company must publish and file with the regulators on an annual basis a simplified prospectus and fund facts for each fund and series it offers for sale. The prospectus and fund facts contain a lot of relevant information on the funds you hold. See below for more information of what is contained within a sample prospectus product page and a sample fund facts.

 

 

As a result of recent regulatory changes implemented in 2014, the prospectus is no longer delivered to investors at the point of sale, unless specifically requested by the investor. The fund facts document is now mailed to investors after the sales process is completed.

 

The most recent versions of these documents are always available on our website in the Legal and Regulatory Section.

Mutual Fund Fees

 

Mutual funds have associated fees. The cost of owning a mutual fund is called the Management Expense Ratio (MER). The MER is an annual fee that is charged by the fund to pay for the costs of running the fund and includes the management fees and operating expenses. The management fees and operating expenses are also subject to applicable taxes. The MER varies by fund and by series. Learn More

The fund may also be subject to a Trading Expense Ratio (TER). The TER represents the costs each fund spends on brokerage commissions for buying and selling the underlying investments. The TER is not part of the MER. Typically, new funds, funds with high portfolio turnover or funds with foreign securities will typically have a higher TER.

 

The MER and TER for each series can be found on the most recently filed fund facts.

Sales or Redemptions Charges

 

In addition to the MER, certain series of funds may have sales or redemptions charges. Advisor Series, Series T5, Load Series T6, and Series T8 may also have a sales charge or redemption fee. Each of these series is offered in a front-end, deferred sales charge or low load sales charge option.

 

You may pay an up-front fee, negotiated between you and your dealer at the time of purchase, if you buy the front-end sales charge option of any of the above series. You will pay a redemption fee if you sell your investment within a certain time period if you buy the deferred or low load sales charge options.

 

Refer to the FAQ for more information: What costs are associated with mutual funds?

How do investors make money from a mutual fund?

 

Investors in a mutual fund can make money from:

 

  • Income distributions – a fund can earn income such as interest and dividends, and from time to time distribute that income to investors.
  • Capital gains distributions – a fund will realize capital gains when it sells an investment for more than its cost. A fund can also realize a capital loss if it sells an investment for less than its cost. Each year, a fund will distribute its net realized capital gains to investors.
  • Capital growth – the value of an investment in a fund will rise when the value of the fund’s investments rises, even if the fund has not sold the investments.

 

If you hold your mutual funds in a registered plan, distributions can only be reinvested in additional securities. If you hold your mutual funds in a non-registered account, distributions will normally be reinvested in additional securities, but you have the option to request to receive distributions in cash.

Taxes and your Mutual Funds

 

In general, you’ll have to pay tax on any money you make on a fund. How much you pay depends on the tax laws where you live and whether or not you hold the fund in a registered plan such as a Registered Retirement Savings Plan or a Tax-Free Savings Account.

 

If you hold your mutual funds in a registered plan, generally, neither you nor your registered plan is subject to tax on distributions paid by the mutual fund or on capital gains realized when the mutual funds are redeemed or switched. If you hold your mutual funds in a Tax Free Savings Account (TFSA), your investment will grow tax free and you can withdrawal your money tax free. See Account Types for more information.

 

If you hold your mutual funds in a non-registered account, distributions will be subject to tax whether they are received in cash or reinvested in additional securities. The amount of tax you pay depends on the type of distribution and your marginal tax rate. If your mutual fund increases in value, then you will be required to pay tax on the gain when you sell the fund.


Mutal Fund Account Types

 

RRSP

 

A Registered Retirement Saving Plan (RRSP) allows you to save for retirement on a tax-deferred basis. Contributions you make to your RRSP (up to your contribution limit) are tax-deductible. Income earned in your RRSP is normally not taxed as long as it stays in the RRSP. However, you will generally pay tax on the full amount of withdrawals from your RRSP. Certain special withdrawals can be made for education (Lifelong Learning Plan) and for purchasing a home (Home Buyers' Plan). These special withdrawals usually do not require the funds to be taxed when withdrawn, however they require you to repay the funds over a specific period of time.

RRIF

 

A Registered Retirement Income Fund (RRIF) is a conversion of an RRSP that allows you to withdraw income during your retirement. You must convert your RRSP into a RRIF (or withdraw the RRSP assets or purchase an annuity) before the end of the year in which you turn 71. Like a RRSP, income earned in your RRIF is normally not taxed as long as it stays in the RRIF. However, unlike a RRSP, you cannot contribute new funds to a RRIF. You must withdraw a minimum amount from your RRIF each year, depending on your age. You will generally pay tax on the full amount of withdrawals from your RRIF.

TFSA

 

A Tax Free Savings Account (TFSA) allows you to save and invest tax-free. Contributions to a TFSA are not tax-deductible, but both income earned in a TFSA and withdrawals are generally tax-free. TFSA contribution room accumulates each year in which you are at least 18 years of age at any time in the year.

RESP

 

A Registered Education Savings Plan (RESP) allows you to save for post-secondary education on a tax-sheltered basis. You can set up a RESP for an individual or as a family plan. Contributions to an RESP can earn government incentives like the Canada Education Savings Grant. Depending on your income and where you live, you may be eligible for other government incentives to help grow your RESP.

 

There is no annual maximum RESP contribution, but there is a lifetime contribution limit of $50,000 for each beneficiary. Contributions to an RESP are not tax-deductible, but income earned in an RESP is normally not taxed as long as it stays in the RESP. The student will generally pay tax on the amount of income and government incentives withdrawn from the RESP – these are called “educational assistance payments”. The contributions to the RESP can generally be withdrawn tax-free.


Retirement Savings Strategies

 

How much do I need for my retirement, am I saving enough, will I be ready to retire when I want to? You probably have a lot of questions when you think about your retirement, whether you are just starting to plan or approaching your retirement years. The answers will be largely dependent on your personal situation.

 

One thing common to all investors the best way to start saving for your retirement is to open a RRSP (Registered Retirement Savings Plan), a registered account created by the Government of Canada to allow you to save on a tax deferred basis for your retirement.

Tax sheltered investment growth

 

You don’t pay taxes on the growth of your investments held in an RRSP until you redeem or switch your investments out of the plan. This makes a big difference in the growth of your investments over time.

 

You will be taxed on the income earned on your investments when you withdraw it from your RRSP, but it is likely you will be in a lower tax bracket in your retirement years.

Reduce Yearly Income Tax

 

Your contributions to an RRSP (up to your contribution limit) are deducted from your previous year’s taxable income.

Contribute on a Regular Basis

 

Saving through a Pre-Authorized Contribution (PAC) is a simple and effective means to ensure you are investing regularly. It is convenient, worry free and flexible. PACs can be set up in the frequency and amount of your choice, (subject to low investment minimums).

Diversify your Investments

 

Consulting with a financial professional will help ensure your portfolio is properly diversified and suitable to meet your individual investment goals and objectives. Diversification ensures your portfolio includes the right mix of assets based on your own personal profile including your investment time horizon and risk tolerance.

Reports

 

Retirement like many things in life is evolving and changing in this post-financial crises world. In this report we look at how Canadians are adapting to this change and provide important financial planning lessons that can be applied as investors plan for retirement.

 


Education Savings Strategies

 

What would you do with $60,000?

 

If you have children, the answer could be to use it to pay for your child's post-secondary education. While the amount seems overwhelming, the best way to prepare is to create a plan, stick to it and incorporate a few key strategies.

Open a Registered Education Savings Plan (RESP)

 

There are many savings vehicles you can use to save for your child's education, only an RESP provides tax deferred growth, combined with the ability to earn Canada Education Savings Grant (CESG) and various other Federal and Provincial incentives. Eligible plans receive annual grants matching 20% of contributions made each year, up to a maximum of $500 per year or $1,000 if carryover room is available. The lifetime maximum CESG limit per child is $7,200.

Invest early

 

You can open an RESP and start saving for a child's education as soon as they are born, provided they are eligible. This provides up to 18 years of tax free growth.

Invest appropriate to your time horizon

 

There are many types of investment products that can be held in an RESP, including equity, balanced and bond mutual funds and GICs as well as cash savings. The allocation of your portfolio may change as the time your child needs the money approaches.

To simplify the investment decision, BMO Mutual Funds offers a suite of Target Education Portfolios. These five portfolios automatically shift from equities to fixed income as their target end date approaches ensuring they maximize growth in the early years and help to reduce volatility as post-secondary education nears.

 

See below for more information on the Target Education Portfolios.

 

Save through a Pre-Authorized Contribution (PAC)

 

A PAC is the best way to save to ensure you meet you financial goals. It is a convenient, worry free way to ensure you are saving on consistent basis. PAC’s are flexible in that you can choose the frequency and have low investment minimums. Even investing small amounts regularly adds up over time.

 

To further help in your planning, the following report on Education Planning looks at some of the costs, choices and opportunities for ensuring your child has a bright future.


Registered Disability Savings Plan (RDSP)

 

Caring for someone with a severe or prolonged disability can be emotionally and financially challenging. A BMO Registered Disability Savings Plan (RDSP) is one component that can help to provide long-term financial security for people with disabilities.

What is an RDSP?

 

Created by the federal government, the RDSP provides people with disabilities with an easy and effective way to save and invest for their long-term financial security. What's more, the government offers incentives in the form of grants and bonds to help you accumulate more. If you are a person with a disability or provide care to someone with a disability, you'll definitely want to know more about RDSPs.

How can a Disability Savings Plan help?

 

RDSPs have three important advantages:

 

  1. As a registered savings plan, earnings grow tax-free until money is withdrawn. This means RDSP contributions can grow faster, helping to accumulate more in the plan.
  2. RDSPs may be eligible for government incentives of up to an annual amount of $3,500 to a lifetime maximum of $70,000 in grants and an annual amount of $1,000 to a lifetime maximum of $20,000 in bonds, which can substantially boost an RDSP's value.
  3. Income payments from RDSPs do not affect income-tested federal government programs, including Old Age Security, the Guaranteed Income Supplement and the Canada Pension Plan. In most provinces and territories, you will still qualify for existing provincial social assistance programs if you have an RDSP.

Who can take advantage of an RDSP?

 

Anyone who is eligible for the Disability Tax Credit may be the beneficiary of an RDSP. To qualify, the beneficiary must:

 

  • Be a Canadian resident.
  • Have a valid Social Insurance Number.
  • Be under the age of 60.
  • Complete a Disability Tax Credit Certificate (Canada Revenue Agency Form T2201) with the assistance of a qualified practitioner and receive notification of approval from the Canada Revenue Agency.

Who can contribute?

 

Anyone can contribute to an RDSP as long as they have written permission from the account holder. There is no annual limit on contributions and the lifetime maximum is $200,000.

 

However, contributions must cease when any one of the following is met: by the end of the year in which the beneficiary reaches age 59, or when the beneficiary no longer lives in Canada, or when the beneficiary no longer qualifies for the Disability Tax Credit, or when the beneficiary dies.

 

Consider making automatic RDSP contributions at regular intervals throughout the year – you will find it easier on your budget and a convenient way to reach your target annual contribution amount. Keep in mind that the sooner your money is invested in an RDSP, the longer it has to grow tax-deferred.

Government grants and bonds

 

There are two types of government incentives available through RDSPs. The Canada Disability Savings Grant can add an annual amount of $3,500 up to a lifetime maximum of $70,000 to an RDSP. The Canada Disability Savings Bond can add up to an additional $1,000 annually to an RDSP to a lifetime maximum of $20,000. How much you are eligible to receive in grants and bonds will depend on the family income of:

 

  • the beneficiary (and spouse, if applicable), beginning in the calendar year the beneficiary reaches age 19.
  • the beneficiary's family, up to and including the year in which the beneficiary reaches age 18.

Plan contributions to maximize grants and bonds

 

Grants and bonds are only available until the end of the calendar year in which the beneficiary reaches age 49, so plan your contributions to maximize these incentives. Don't worry if you are late in setting up your RDSP or miss making a contribution. Beginning in 2008 and for a maximum of 10 years, unused grants and bonds are carried forward, giving you the opportunity to catch up by contributing more than $3,500 a year. Note that when catching up, the maximum payable in any one year is $10,500 for grants and $11,000 for bonds.

 

No additional forms need to be filled out. You will receive past grants and bonds as long as you were eligible for the Disability Tax Credit in the years for which you intend to catch up and your tax returns were filed for the two years prior to each year you intend to receive past grants/bonds. You need only contribute the correct amount to receive all of the grants/bonds to which you are entitled.

RDSP investment options

 

All our BMO Mutual Funds are available to be held inside your RDSP account with the exception of any funds denominated in U.S. Dollars.



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