Senior Living: How to choose a mutual fund

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Let’s start by giving you a general overview of what a mutual fund is and why you should use it when investing. A mutual fund (MF) is just that – a fund of different types of products such as stocks, bonds and money markets.

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When you invest in an MF, you invest money in the fund with everyone else and this measures your contribution in units. You will be given a number of shares based on the daily market price known as the NAV price per share (net asset value) and you will share in the income, gains, losses and expenses of the fund you now partially own.

MFs are a great way for any investor to take advantage of investing in a fund managed by a professional investment specialist whose sole purpose is to analyze the financial markets and monitor performance.

MFs also offer great diversification. A typical fund might have a portfolio made up of 60 to 100 different stocks across 15 to 20 industries. The average investor cannot be expected to hold a stock portfolio of this size. It is not possible to have the time, knowledge or experience to oversee such a plan. Hence, investors large and small are opting for MFs, which are now available in varying degrees of security, income and growth potential.

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Today there are over 135,000 MFs to choose from worldwide, with over $1.7 trillion invested in Canada alone. Let’s examine the different types that you can consider.

1. Money Market MFs: Canada or US, short term, low risk, variable interest rates.

2. Fixed Income MFs: Designed to provide a steady stream of income rather than capital appreciation.

3. Bond funds MFs: Various types with profit through interest income.

4. Dividend MFs: Stocks and bonds together in the fund to provide a mix of income and growth. You can use the dividend tax credit.

5. Growth/Equity MFs: This is the most popular MF currently offered across all sectors: US, Domestic, Global, International, and Small, Mid and Large Caps. This type of MF is designed to provide long-term capital growth and has a variety of risk and reward characteristics. This would definitely be more volatile than the money market or fixed income/bond MFs.

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6. Balanced MFs: These MFs aim to provide a balanced mix of security, income and capital growth. A typical mixed fund consists of 60 percent equities and 40 percent fixed income securities. Good choice for the average investor.

7. Index MFs: This would be my recommendation for most people. Index MFs reflect the performance of a market index; B. S&P/TSX or DAX. The fees and MER are lower and they are very similar to an ETF structure. This is a cost-effective way for an investor to pursue a passive investment strategy.

8. Close-end MFs: These MFs are by far the riskiest as they only issue a set number of shares that are traded in the market – often through an initial public offering (IPO). This is not the same as the MFs discussed above, which are all open-ended and easily traded on the stock exchange.

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If you decide to invest in MFs, be aware of charging fees, inventory fees, and management fees. This is expressed in the Administrative Expense Ratio (MER), but it’s a good idea to check the breakdown.

Due to increasing competition in the market, there will be alternative funds that have lower fees and no front-end or DSCs, Deferred Sales Fees (built-in back-end sales fees). Don’t choose MFs as a short-term investment unless you opt for the money market funds. And as a final note, make sure you know when the fund’s payout times are so you can avoid higher prices or tax implications when you buy into the fund.

— Christine Ibbotson is a financial writer, radio host and YouTuber. Check out her YouTube channel: Ask The Money Lady – Your Canadian Financial Coach. [email protected]