17.3.1 Advantages Of Mutual Funds

Advantages of Mutual Funds

Mutual funds provide varying degrees of safety, income, and growth for investors. In addition to these basic provisions, mutual funds also offer investors more specific advantages. The most favorable characteristics are described below.

Low-cost Professional Management

Mutual funds are continually managed by a fund manager who is an investment specialist, which is perhaps one of the main advantages that mutual funds offer. Fund managers analyze the financial markets and select securities that best match a particular fund’s investment objectives. They also play the important role of continuously monitoring fund performance and fine-tuning a fund’s asset mix as market conditions change.

Key Points of Professional Management

• Continuous Market Analysis and Security Selection: Ensuring that the portfolio aligns with investment goals and adapts to market changes.
• Economic Use of Expertise: Both small and wealthy investors gain access to professional management without high costs.

Diversification

Fund ownership provides an inexpensive way for small investors to acquire a diversified portfolio. A typical large fund might have a portfolio consisting of 60 to 100 or more different securities in multiple industries. For individual investors in a portfolio of stocks, acquiring such a broad-ranging portfolio is likely not feasible. When individual accounts are pooled in a fund, however, the fund sponsor enjoys economies of scale that can be shared with the unitholders. Thus, fund investors have access to a wider range of securities that can trade more economically than they would as individual investors.

des diffni diffnt Investors gain multiple benefits from diversification, such as:

• Risk Reduction: Spreading investment across different asset classes reduces the impact of poor performance in any one asset.
• Economies of Scale: The combined investment results in trading and administrative efficiencies.

Variety of Types and Transferability of Funds

The many types of mutual funds, ranging from fixed-income funds to aggressive equity funds, enable investors to meet a wide range of objectives. Many fund families also permit investors to transfer between two or more different funds managed by the same sponsor, usually at little or no added fee. Transfers are also usually permitted between different purchase plans under the same fund.

Purchase and Redemption Flexibility

Mutual funds offer flexible purchase options: one-time lump-sum investments or regular smaller purchases under a pre-authorized contribution plan. This ability to make accumulative, low-cost contributions is one of the main advantages. For example, an investor can open an account through a pre-authorized contribution plan with as little as $100 and then continue to contribute the same amount monthly.

Flexible redemption options are also available, making these investments highly accessible.

Liquidity

Mutual fund shareholders can redeem their shares or units for cash at NAVPS (Net Asset Value Per Share). Payments must be made within two business days, in keeping with the securities industry settlement requirements.

Ease of Estate Planning

Shares or units in a deceased person’s mutual fund continue to be professionally managed during the probate period until estate assets are distributed, unlike other types of securities which may not be readily traded during the probate period, even when market conditions are changing drastically.

Did You Know?

The term estate refers to all the assets owned by a person at the time of his or her death. Estate planning is the process of arranging ahead of time for the administration and disposal of such property when the time comes. Probate is the process of validating the person’s will after death before distributing the estate assets.

Loan Collateral and Margin Eligibility

Fund shares or units are usually accepted as security for a bank loan and are acceptable for margin purposes, thus offering the benefit of leverage. However, using fund assets for this purpose also poses risk.

Various Special Options

Mutual funds consist of not only an underlying portfolio of securities, but also customer services such as:

• Reinvestment of Dividends: Most mutual funds offer the opportunity to compound investment through the reinvestment of dividends.
• Regulatory Filing: Sponsors file multiple reports annually for regulatory disclosure, including the annual information form (AIF), audited annual and interim financial statements, and an annual report, easily available through the SEDAR website.
• Record-keeping: Managed products provide record-keeping assistance, helping with income tax reporting and other accounting needs.

Key Takeaways

• Low-cost access to professional management benefits investors of all scales.
• Diversification reduces individual investment risks and offers broad exposure to various asset classes.
• Multiple fund types and transfer options cater to diverse objectives.
• Flexible purchase and redemption terms ensure convenience and liquidity.
• These funds facilitate estate planning by keeping investments professionally managed.
• Fund shares are acceptable as loan collateral and margin, enhancing financial maneuverability.
• Additional services like dividend reinvestment, regulatory filings, and record-keeping add significant value.

Frequently Asked Questions (FAQs)

What are mutual funds?

Mutual funds are investment vehicles that pool money from multiple investors to buy a diversified portfolio of assets managed by professional fund managers.

Why opt for mutual funds over individual stocks?

Mutual funds offer diversification, professional management, and convenient options for investment and redemption, making them less risky and easier to manage than individual stocks.

How does diversification reduce risk in investments?

By spreading investments across various asset classes and industries, diversification minimizes the impact of poor performance from any single security, thereby reducing overall risk.

For more detailed information and related topics, explore our additional chapters in the Canadian Securities Course (CSC) certification exam guide.