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Frequently Asked Questions
Getting Started
a. Are Mutual Funds for me?b. How Do I Know How My Mutual Fund is Doing?
c. What Are the Costs for Mutual Funds?
d. So, Are Mutual Funds for Me?
a. Are Mutual Funds for Me?
To be a successful investor you don't need $75,000, years of experience, subscriptions to the best investing newsletters, and the time to read them. All you need is a good mutual fund manager.
Mutual funds are composed of investors just like you who have mutually decided to pool their money and hire a professional investment manager. You don't even have to round up all your friends and convince them to invest with you. Existing mutual funds are offered by investment companies, banks, trust companies, credit unions, insurance companies, even professional organizations.
The advantages of mutual funds are professional management and investment diversification. By not centralising all your funds in one specific investment, you reduce your risks while increasing the possibility of gains. Because mutual funds are generally regarded as long-term investments, you don't have to worry about them daily.
Mutual funds have differing objectives. Some may concentrate on speculative growth investments, others on preservation of capital and a steady income. The trick is to find a fund which shares your objectives. Mutual fund portfolios may include common stocks, preferred shares, bonds, treasury bills, precious metals, and real estate in any combination.
Day-to-day investment decisions are made by the fund manager who decides the asset mix within the objectives of the fund.
b. How Do I Know How My Mutual Fund is Doing?
The total value of the fund is called the net asset value, or NAV. This is calculated by taking all the fund's investments at market value and subtracting management fees. Dividing the NAV by the number of units sold determines the net asset value per share, or NAVPS.
The NAVPS is calculated on a daily or weekly basis (except for real estate funds, calculated monthly) and printed in the mutual fund tables of The Financial Post or the Report on Business section of The Globe and Mail.
You will also receive quarterly and annual reports on the performance of the fund and, if you choose automatic reinvestment of any proceeds, notices of the additional shares purchased.
c. What Are the Costs for Mutual Funds?
There are varying costs for mutual fund professional management. There may be commissions on the purchase of units, which are payable either to a broker or directly to the fund management company as a "front-end load". Front-end loads are usually negotiable. There may be redemption fees for withdrawals called "back-end loads" calculated on your original capital investment or the market value. Back-end loads usually decline the longer you keep your money in the fund.
There are on-going management fees charged by the fund manager for research, buying and selling investments for the fund, and issuing reports. These generally range from 1% to 3% of the fund's total assets for the year.
Fees do not always reflect the performance of the fund. Since mutual funds are generally regarded as long-term investments, annual management fees are usually more important than loads.
d. So, Are Mutual Funds for Me?
Professional management, diversification, and long-term gains are the benefits of mutual funds.
Your financial advisor or broker can advise you on which mutual funds are best for you and your investment goals.
If you prefer spending time with your children or learning to play the zither to poring over daily investment reports, then mutual funds may be for you.
Investment Articles
Choosing the Right Mutual Fund
There certainly are a lot of choices. With more mutual funds available than there are individual stocks listed on the TSE, Canadians have hundreds of alternatives. Before you get out your dartboard, here's how to narrow down the possibilities and pick a fund that's right for you.
A mutual fund is simply a number of investors like you who mutually agree to pool their money and pay professional money managers to research, make investments and report results. The advantages are professional management and greater diversification than most individual investors can accomplish on their own.
While there can be no guarantees of success, here are a number of points to consider.
Fund Objectives
Funds have different objectives. Some aim for high-risk growth and capital gains, some aim for low-risk dependable income, some combine the two. Choose a fund that fits your objectives. If you are young and have many years of investing ahead of you, a higher-risk fund gives you the opportunity for greater returns while you have more years to recover from the occasional poor year.
If you are nearing retirement, preservation of your savings combined with a steady income probably makes more sense. Ask yourself, "What do I want from a fund and how much risk can I accept?" before asking, "What funds are available?"
Type of Investments
Funds usually specialise in one kind of investment: stocks, bonds, treasury bills, precious metals, mortgages, or venture capital investments in new and expanding businesses. Funds may also concentrate on a geographic area: Canada, U.S., Europe, Latin America, or Asia. International funds typically combine many areas. The kind of investment and geographic area are determined by the fund's objectives.
Again, choosing a fund based on its objectives is probably better than investing in an area just because you had a great holiday there.
Fund Performance
Past performance won't predict the future, but it will tell you how a particular fund weathered poor markets or bloomed in good times. Newspapers have excellent summaries of fund performance, particularly the Financial Post and the Report on Business section of The Globe and Mail. The Financial Post, for example, reports one month, one year, three year and five year returns. It also gives a measure of volatility, the historical variability in a fund's monthly rate of return over three years. High volatility means bigger gains and losses, low volatility indicates a more stable rate of return.
A fund's quarterly and annual reports, including the manager's expectations for the near future, are also an essential source of information. A number of organizations, such as Infomart and Info Globe, specialise in financial research and will help you gather information on mutual funds. Public libraries also contain back issues of financial newspapers and may be used to access on-line databases.
Fund Manager
Within market conditions, the fund manager is ultimately responsible for the performance of the fund. Check to see how long the manager has been there. Three year fund returns mean little if the manager has changed within the last month.
Costs
The costs for professional money management vary, but usually include commissions, redemption fees and management fees. Commissions are one-time fees for the purchase of shares in a mutual fund. Redemption fees are charges for withdrawing money from the fund and usually decline over time. Management fees are a small annual percentage of your investment deducted from your net asset value.
When comparing the performance among funds, be sure the costs are deducted before the returns are calculated, and remember a higher management fee doesn't guarantee better performance.
RRSP Eligible
Many funds are eligible to be held within your RRSP, so any gains are sheltered from tax until withdrawal. If you also have non-RRSP investments, it is generally considered best to hold income-bearing rather than capital-growth funds within an RRSP.
Prospectus
The essential information about a mutual fund is contained in its prospectus, a summary of objectives, type of investments, costs and RRSP eligibility. Read the prospectus carefully for it will give you answers to many of your questions. Mutual funds are a powerful way to access investment diversity and professional management skills usually unaffordable to the average investor. Choose the objectives, performance, management and costs you like best, then stick with the fund for the long term, letting the professional manager do the buying and selling.
Your best source of information about mutual funds is your investment adviser or broker. He or she will have the information you need to make a wise choice among mutual funds so you can save your dartboard for recreation.
Investment Styles
Developing a sense of investment style can be like deciding if your tie matches your suit. Especially when it comes to the question of classifying the way in which different portfolio managers direct an equity mutual fund.
Being knowledgeable about investment style improves the chance of finding a fund manager who selects securities in a manner that complements your individual risk profile. Knowing how to mix and match between the three primary investment styles rewards investors with an extra dimension of diversification, which in turn serves to minimize risk.
Portfolio managers who pursue a value investment style seek companies with a current depressed stock price that does not reflect the financial qualities the company has shown in the past, or should display in the future. Such companies are compared to other firms within the same industry, and given a thorough financial check-up to determine whether the neglect by stock market investors has a sound basis. A company may easily become "under-valued" for short-term reasons that it should be able to overcome in the long run. A company acquired at a low price will be sold when the price of the stock rises as other investors come to recognize the company's long-term business strengths.
Alternatively, a growth investment style will assemble a portfolio of companies that have demonstrated their ability to rapidly increase their sales and earnings in the past, and more importantly, maintain the potential to do so in the future. The current stock price of such stocks may seem high from a snapshot of their current financial characteristics, but the growth investor anticipates an explosion in earnings that enables the company to outpace the rate of growth that the stock market expects.
A third investment style, sector rotation, attempts to discover broader economic themes that might favour a certain industry, while disadvantaging others. For example, if the commodity price of oil was expected to rise by 25% over the next two years a manager who used this style might purchase the securities of oil-producing companies and the companies that service the oil industry, but avoid securities in the airline industry where profits are inversely related to the price of fuel.
Making a choice amongst these three alternative investment styles is an art, not a science. Indeed, there are instances when a portfolio manager might opt to use a combination of these modes of analysis to arrive at a decision about a specific stock selection.
For instance, a blend of styles may suit managers that manage larger-capitalization Canadian equity funds, since 30% of the group weightings for the TSE 300 are to be found in groups that fall under the Resources sector. The profitability of a Canadian company engaged in the business of mining metals and minerals, producing oil and gas, or creating paper and forest products, will eventually depend on the prevailing price levels of the commodity they provide. Given that many large-cap Canadian stocks are resource-based, a manager may start by analyzing the prospects for the specific resource, before moving on to determine if the company is also a good choice from a value perspective.
The last distinction managers make in describing their investment styles is whether they prefer to take a primarily top-down or bottom-up approach to investing.
A top-down perspective begins with a macro-economic or "big-picture" analysis of equity markets. After the most promising industries or market sectors are discovered, the manager then simply selects the largest or most representative companies in that sector to form the portfolio.
A bottom-up approach places little emphasis on the "big picture" of the overall economy, but works on a micro-economic level, analyzing companies one-at-a-time. If no securities turn up that meet their investment criteria, they hold money market securities and bide their time. A bottom-up manager is usually very patient, and has the confidence that attractive new buying opportunities will inevitably present themselves.
A sense of style is always worth acquiring. Sure, there are rules, but they are not mutually exclusive. Diversification should remain the key consideration for an investor. By owning several mutual funds all run by managers touting a single style, one is less diversified than an investor who owns a single fund from each of the three styles outlined above. Given that certain investment styles have often proven to wear better during some stock market cycles than others, assembling an assortment of styles will help prevent your investment results from going out of fashion.
(Courtesy of Mackenzie Financial)
International Mutual Funds
What lets you diversify your portfolio, decrease your exposure to risk and potentially increase your fund returns? International investing, of course!
a. Diversify Your Portfolio.
The Canadian market represents less than 3% of the world stock market capitalization. In addition, the Canadian economy is largely based on a sector that is prone to cyclical volatility- resources. In fact, energy and mining firms represent a third of the companies listed on the Toronto Stock Exchange. Most mutual fund investors aim to decrease volatility. Investing in International funds allows you to achieve this goal by exposing your portfolio to markets that are at different points in the economic cycle and concentrated in sectors not well represented in Canada. In addition, investing globally lets you participate in the 97% of the market outside of Canada.
b. Decrease Risk and Increase Potential Returns
Since investing in global funds allows you to diversify your portfolio across different sectors and economies, the fluctuations in your yearly returns will decrease. Many people believe that decreasing the volatility (i.e., risk) of a fund portfolio means sacrificing returns. This is not necessarily true. The ten year return, as at June 30, 1998, of the Morgan Stanley Capital World Index is 13.91% whereas the Toronto Stock Exchange return is 11.0%. International performance allows you to potentially increase your returns while the diversity offered worldwide lets you reduce your risk. There are many benefits to international funds, yet there are rules regarding foreign content in your RRSP.
(Courtesy of Dynamic Mutual Funds)