17.3 Overview Of Mutual Funds

Overview of Mutual Funds

Advantages and Disadvantages of Mutual Funds

A mutual fund is a single investment vehicle sponsored by an investment management company on behalf of many investors. By selling shares or units to a pool of investors, the fund raises capital, which is then invested according to the fund’s investment policies and objectives. The fund makes money from the dividends and interest it receives on the securities it holds. It may also earn capital gains from trading its investment portfolio.

Numerous mutual funds exist in the Canadian market and globally that cater to varied investment objectives. Some funds take a passive approach by replicating a stock or bond index. Others offer moderate risk and moderate returns by balancing investments between fixed income and equities. Still others may be very active by constantly trying to beat the market.

Types of Fund Structures

Mutual funds’ investment objectives are stated in a document called the Fund Facts document. This document discloses the degree of risk the fund is exposed to, the main types of securities held in its portfolio, and its historical returns, among other things.

Investors in a mutual fund become unitholders or shareholders in the fund. As such, they share in the income, gains, losses, and expenses the fund incurs in proportion to the number of units or shares they own. Professional money managers manage the assets of the fund by investing the proceeds according to the fund’s policies and objectives, and based on a particular investing style.

Mutual funds are sold in units or shares, depending on the structure, which are redeemable on demand at the fund’s current offering price. In the financial press, the offering price is expressed as the net asset value per share (NAVPS) or net asset value per unit. The NAVPS depends on the market value of the fund’s portfolio of securities at the time of redemption.

    pie title Distribution of Investment Types
	    "Equities": 45
	    "Fixed Income": 35
	    "Cash": 20

Did You Know?

The mutual funds industry in Canada has experienced tremendous growth since 1980. In that year, mutual fund net assets totalled $3.6 billion in Canada. By March 2020, mutual fund net assets under management were more than $1.45 trillion. For more information, the Investment Funds Institute of Canada releases monthly statistics and updates (www.ific.ca).

Key Considerations for Mutual Fund Sales Representatives

Individuals licensed to sell mutual funds must understand the types and amounts of risk associated with each fund. Financial services professionals assess each client’s profile to ensure that the mutual fund recommendations properly reflect that client’s risk tolerance and investment goals. Note that clients’ goals are not static, so the review process must be ongoing.

Proper diversification is essential, with a client’s portfolio containing a mix of cash or near-cash investments, equity investments, and fixed-income investments.

Glossary

Net Asset Value Per Share (NAVPS): The market value of a fund’s portfolio of securities at the time of redemption, expressed per share or unit.

Fund Facts Document: A regulatory document that discloses key information about a mutual fund, including risk, objective, and historical returns.

Frequently Asked Questions (FAQs)

1. What are the major advantages of investing in mutual funds?

• Diversification: Mutual funds allow investors to diversify their portfolios by pooling funds and investing in a variety of assets.
• Professional Management: Funds are managed by professional fund managers, allowing investors access to expert management.
• Liquidity: Mutual fund shares or units are redeemable on demand, providing flexibility to investors.

2. What risks are involved in mutual fund investment?

• Market Risk: The value of mutual funds can fluctuate with market changes.
• Credit Risk: For funds investing in bonds, credit rating changes can affect the bond values.
• Interest Rate Risk: Fluctuations in interest rates can impact both equity and fixed-income investments.

Key Takeaways

• Mutual funds pool money from multiple investors to invest in various securities, aligned with predefined investment policies and objectives.
• Investments in mutual funds offer advantages such as diversification, professional management, and liquidity.
• Understanding the NAVPS, Fund Facts Document, and the roles of money managers are crucial concepts for mutual fund sales representatives.
• Ongoing assessment and proper diversification of client portfolios are key responsibilities of mutual fund advisors.

In this section

• 17.3.1 Advantages Of Mutual Funds
  Explore the numerous benefits of investing in mutual funds including low-cost professional management, diversification, liquidity, and more.
• 17.3.2 Disadvantages Of Mutual Funds
  Explore the key disadvantages of mutual funds including associated costs, short-term unsuitability, systematic risk, and tax complications. Gain detailed insights to better inform clients.
• 17.3.3 Mutual Fund Structured As Trust
  Learn about the structure and advantages of mutual funds structured as trusts, focusing on their tax benefits, roles and responsibilities, and investor rights.
• 17.3.4 Mutual Fund Structured As Corporation
  Explore the setup, conditions, advantages, and taxation aspects of mutual funds structured as a corporation, including investor benefits, financial conditions, and dividend strategies.
• 17.3.5 Organization Of Mutual Fund
  Understand the structure and key roles within a mutual fund, including directors, fund managers, distributors, and custodians. Learn about their responsibilities and how they interact to ensure the proper management and performance of the fund.