Mutual funds are investment vehicles that allow a group of investors to pool their money together and invest in a diversified portfolio. These portfolios are typically comprised of a variety of assets such as stocks, bonds, and other funds. The specific investments within a mutual fund are determined by the fund’s investment objectives.
Investing in Mutual Funds
When you invest in a mutual fund, you’re essentially buying shares or units of the fund. As more investors contribute, the fund issues new units or shares. The day-to-day management of the fund, including decisions about when to buy and sell investments, is handled by a professional portfolio manager.
Investing in mutual funds involves certain key considerations:
- Risk: The risk and return of a mutual fund are dependent on its specific investments. It’s important to note that mutual funds are not guaranteed or insured by any government agency.
- Past Performance: While past performance can provide some insight into a fund’s volatility or risk, it is not a reliable indicator of future performance.
- Pricing: Mutual funds are bought at the fund’s net asset value (NAV) plus any applicable sales charges. They can be sold at the current NAV minus any redemption fees and charges.
- Fees: Mutual funds come with fees and expenses that can impact your overall return on investment.
Earning from Mutual Funds
Investors can earn money from mutual funds in two ways:
- Capital Gains: If the fund’s assets increase in value, and you sell your mutual fund shares for more than you paid, you’ll have a capital gain. Conversely, if you sell for less than you paid, you’ll have a capital loss.
- Distributions: Depending on the type of fund, you may receive distributions of dividends, interest, capital gains, or other income the fund earns on its investments.
The tax implications for mutual funds depend on whether they are held in a registered or non-registered account. In a non-registered account, any earnings are subject to tax. In a registered account, such as an RRSP, RRIF, or RESP, earnings are tax-free as long as they remain in the plan. With a TFSA, earnings are tax-free even when withdrawn.
Purchasing Mutual Funds
Mutual funds can be purchased from a variety of financial institutions, including banks, trust companies, life insurance companies, credit unions, mutual fund dealers, and investment firms. They are typically sold through financial advisors who are registered with their provincial regulator.