Mutual Funds

Good question! A mutual fund is a pool of investments that’s managed by a professional. Your money is grouped with people who have similar goals and can be invested in stocks, ETFs, bonds, cash or other mutual funds.

They’re an easy way to invest in a professionally managed, diverse portfolio with a low minimum investment.

Learn more about mutual funds with our mutual fund basics article or by getting in touch with a BMO investment professional.

You don’t need a lot of money to start investing in mutual funds. For example, you can invest in a BMO SelectTrust^® Portfolio with as little as $500 or set up a Continuous Savings Plan for as little as $50 each month

For a detailed breakdown of individual mutual funds you can access our mutual funds list or the mutual fund 'Fund Facts' documents.

To invest in mutual funds, just book an appointment online to book an appointment. Open a new tab to book an appointment.to meet with a BMO investment professional at your local branch. If you prefer, you can call 1-800-665-7700 to do it over the phone. If you’re already a BMO customer, you can log into Online Banking and open an investment account or purchase mutual funds for an existing investment account. 

If you already have an investment account with us you just have to sign in to buy mutual funds. If you don’t have an account with us yet then you’ll have to book an appointment online or call 1-800-665-7700.

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An index fund is designed to match the performance of a stock market index (like the S&P/TSX Composite Index, for example) by holding a portfolio of investments that represent the ones that index tracks. This is sometimes called “passive investing,” because the investments in the fund aren’t actively managed to influence their performance. They’re just selected according to what a particular index is based on.

The simplest way to look at it is that a stock is a small piece of a single company, and a mutual fund contains many different stocks, bonds, cash or even other funds. When you buy shares (stocks) in a company, you’re buying a fraction of that company. When you purchase mutual funds, you’re investing in a bit of everything in the fund.

Any investment comes with risk. Before you buy a mutual fund (or mutual fund portfolio) you should make sure that it matches your goals and risk tolerance. There are more conservative mutual funds that try to minimize risk, growth-focussed mutual funds that try to maximize your return and a bunch of different options in between.

Mutual funds are often considered safer than other investments because instead of only being tied to one asset (like a specific stock) they contain a pool of different investments.

There are lots of different kinds of mutual funds, each created to meet the goals of a particular type of investor. BMO Mutual Fund options include Security Funds, Equity Growth Funds, Income Funds, U.S. Dollar Funds, Growth Funds and Managed Programs.

You can access the full mutual fund list here or learn more by reaching out to a BMO investment professional by booking an appointment or giving us a call.

There are some costs associated with mutual funds – management fees, service fees, taxes and other operating expenses. They’re deducted before your returns are calculated, so you aren’t charged separately. Management Expense Ratios (MERs) on Canadian mutual funds are typically below 3%. You can find all the fees associated with any BMO Mutual Fund in its Fund Facts document.

Learn more about BMO Investments Inc.’s processes for unclaimed property.

A mutual fund distribution generally represents the amount of income earned on a fund’s portfolio investments (income earned), as well as net capital gains from the sale of those portfolio investments, passed on to the fund’s investors (or unitholders). The fund’s income earned and net capital gains for a calendar year may be passed on to the fund’s unitholders on a monthly, quarterly, or annual basis. Certain distributions may also represent a return of capital (ROC).

In addition to providing income to unitholders, distributions also reduce the tax liability for BMO mutual funds, as they’re subject to tax at the highest personal income tax rate on income earned and net capital gains retained in the fund (undistributed income). This rate is often higher than the rate of tax paid by individual unitholders, who are generally taxed based on marginal personal income tax rates. It is therefore generally more tax efficient for a mutual fund’s income earned and net capital gains to be distributed to unitholders.

The distributions most commonly paid by mutual funds are capital gains, interest income, Canadian dividend income, foreign income, and return of capital (ROC).

• Capital gains distribution is made from the profits (i.e., net capital gains) realized by the mutual fund on the sale of the fund’s assets (investments).
• Interest income distribution occurs when a mutual fund receives interest on its investments in debt securities, such as bonds.
• Canadian dividend income distribution represents dividends received by the mutual fund from its investments in shares of Canadian corporations.
• Foreign income distribution generally occurs when the mutual fund receives investment income (such as interest and dividends) from its non-Canadian investments.
• Return of capital (ROC) occurs when a portion of the original investment amount (capital) is returned to investors by the mutual fund (see the section How do ROC distributions differ from other distributions?). ROC can be distributed for one of two reasons:
  1. To pay a fund’s fixed distribution rate (i.e., under a monthly income fund, Series T, etc.). ROC may be used, in these circumstances, as part of the distribution if the fund is not generating enough income to support the target payout.
  2. To adjust the income distribution when the distribution estimate is higher than the actual amount of income generated in the fund. As explained further in the When and how does BMO report distributions? section below, a mutual fund typically finalizes its distribution after year end (i.e., after amounts are distributed for the year). This may result in excess distributions paid throughout the year. The amount of any excess distributions would be reclassified as ROC in February.

When a mutual fund pays out a distribution on units held in a non-registered account, investors can either receive it in cash or have it reinvested in the form of additional units.

• Reinvested distributions are treated as new purchases and, therefore, impact the book value of an investment.
• Cash distributions do not affect the book value of an investment, unless the distribution is ROC (see the section on How do ROC distributions differ from other distributions?).

Distributions on units held in a registered account, such as a Registered Retirement Savings Account (RRSP), Tax-Free Savings Account (TFSA) or a First Home Savings Account (FHSA), must be reinvested in additional units. The reinvested distributions do not count as contributions to the plan (so there is no impact on an investor’s contribution room). The distributions representing income earned or net capital gains are not taxable to the investor while held within the registered plan.

Given the non-impact to investors of distributions on mutual fund investments held in registered accounts, the remainder of this FAQ focuses on the distribution impacts for mutual fund investments held in non-registered accounts.

BMO mutual funds finalize distributions in January and February of each year when the total income earned in a fund and the types of income are determined and reported to investors.

The income distributed throughout the year must be reclassified to match the actual amount and types of income earned. As noted in the ROC description above (under What are the different types of distributions? section), if the income distributed is more than the income earned in the fund, the amount is reclassified as ROC which has an impact on the BV of an investor’s units (as described under the How do ROC distributions differ from other distributions? section).

Distributions on units held in non-registered accounts are reported to Canadian resident unitholders on a T3 tax slip, as well as on an RL-16 tax slip for Quebec unitholders. In the case of a non-resident unitholder, the distributions are reported on an NR4 tax slip.

When a mutual fund pays a distribution, it can impact both the Net Asset Value and Book Value of holdings in the following ways:

• Net Asset Value (NAV) is the price of a mutual fund’s assets, less its liabilities, and is used to determine the price per unit of the fund. It is calculated daily using the closing market price of the securities held by the mutual fund to determine the value of the fund’s assets (investments). The NAV will fall when distributions are paid, because the distribution is withdrawn from the fund’s assets. Conversely, the NAV may increase during the year as interest, dividends and net capital gains accumulate in the fund.
  
  Example:
  
  An investor owns 10 units with a NAV of $11/unit. (Market value = $110)
  The fund pays a distribution of $0.50/unit. The NAV decreased to $10.50/unit following the distribution ($11/unit - $0.50/unit = $10.50/unit) and the new market value is $105. (10 units x $10.50/unit = $105).
• Book Value (BV) (or cost) is the amount that an investor paid for their investment in a mutual fund. The BV is generally the gross amount paid by the investor to acquire units in the mutual fund, including any transaction charges related to the purchase where applicable, adjusted for reinvested distributions and any ROC. The BV is relevant to determining the adjusted cost base of units for income tax purposes. The adjusted cost base is generally equal to the average price paid on a per-unit basis (after considering certain adjustments for income tax purposes) and is used to calculate any capital gain or loss when an investor sells units in the mutual fund. The BV divided by the number of units owned will generally represent the adjusted cost base per unit. However, it is advisable to consult with a tax advisor to determine if any additional adjustments are required in your specific circumstances.

To calculate the book value of a mutual fund investment prior to the sale of units, refer to the BMO mutual fund client statement or transaction history, along with the annual tax slip(s) (see When and how does BMO report distributions? for more information on the relevant tax slips). When an investor sells units in the mutual fund, the disposition details, including the BV, will be reported on a T5008 tax slip and, for residents of Quebec, on an RL-18 tax slip.

The BV is generally the gross amount paid by the investor to acquire units in the mutual fund, including any transaction charges related to the purchase, adjusted for reinvested distributions and any ROC. If any units have previously been redeemed, the book value will be reduced by the cost of those units. As indicated in the section How do distributions impact your investment? the market value represents the current value of the mutual fund investment, which fluctuates due to changes in the mutual fund's NAV.

ROC distributions are not part of a fund’s rate of return or yield; rather, they reduce the book value of investments. This may impact the amount of any capital gain or loss investors realize when eventually they sell units. ROC can impact investments in the following ways:

• ROC amount is not taxable as it is a return of an investor’s own invested capital, which has already been subject to taxation.
• ROC distribution lowers the book value of an investor’s holdings and the adjusted cost base per unit for income tax purposes.
• ROC can impact the sustainability of a mutual fund’s distribution rate. It is sustainable when the invested capital is not depleted over time. However, if a fund dips into the invested capital to support the distribution, the practice may leave less investment for future years.

Let’s look at an example of how ROC can impact BV (or cost)

Example of BV (without ROC distribution):

• $1,000 initial investment, $500 subsequent purchase, and a $75 distribution (of interest and other income).
• Distributions are automatically reinvested in additional units.
• BV (or cost) = Initial investment + subsequent purchases + reinvested distributions.
• $1,000 + $500 + $75 = $1,575 BV (or cost).

Example of BV (with ROC distribution):

• $1,000 investment, $500 subsequent purchase, and a $75 distribution (of which $50 is interest and other income and $25 is ROC).
• Distributions are automatically reinvested in additional units.
• The total BV (or cost) will be reduced by the ROC that was received. So, the BV (or cost) in this case will be: $1,000 + $500 + ($75 - $25) = $1,550 BV (or cost).

Note: ROC lowers the book value

ROC distributions can reduce the BV of a mutual fund investment to zero. This occurs when the fund has distributed all the money that the investor has invested in a fund as ROC distributions. If the BV of an investment is zero, the ACB of that investment on a per-unit basis will generally also be zero. In these circumstances, ROC distributions may continue to be paid, resulting in a negative BV of the investment and a negative ACB on a per-unit basis. For income tax purposes, a negative ACB is treated as a capital gain for income tax purposes. As an investor, it is therefore important to track the BV and its impact on the per-unit ACB to ensure that any negative ACB is reported by the investor as a capital gain for income tax purposes. The amount of any reported capital gain should be added back to the ACB of the units to avoid double tax when the units are actually sold.

It is recommended that investors seek the advice of a tax professional when determining the ACB of their units and the potential requirement to report a negative ACB as a capital gain.