In another post, we explained that exchange-traded funds (ETFs) now manage over U.S. $4 trillion of investor assets worldwide. This is a huge figure, but it’s paltry compared to what another well-known investing vehicle has amassed.
We’re talking about mutual funds. They’re a giant in the world of investing, they touch most corners of the markets and they are owned by millions of individuals worldwide.
Here’s what you need to know to start learning about this important investment vehicle.
What are mutual funds?
Simply put, mutual funds, as the name implies, are pools of assets that are professionally managed. Rather than investing on your own in individual securities, you can place your money with a fund company that makes the decisions for you. They do the necessary research on various companies and sectors, and they decide when to buy or sell a security.
It’s easy to understand why mutual funds became so popular. Most people do not have either the time or expertise to manage their investments. Mutual funds are one way for individuals to outsource this crucial part of their lives.
Types of mutual funds
There are many kinds of mutual funds. Some invest in U.S. equities, for example. Others may be focused on stocks in the United Kingdom, Canada or other markets. And many mutual funds don’t buy any stocks at all: bond funds are incredibly common. All this is to say that mutual funds are not the same. There are many variations, including those based on the sector, country or kind of security (stocks or bonds, typically) in which they focus.
How a mutual fund invests clients’ money will depend on the fund’s mandate: its stated objectives. Typically laid out in a long-form document called a prospectus, the mandate explains what the fund managers are allowed to invest in. It gives potential investors a sense of what kind of fund they are being offered. If you’re looking for exposure to Canadian bonds, for instance, you would want to consider a fund with a mandate to invest in Canadian fixed-income products, not Brazilian equities!
Nothing is free (what about fees?)
Nothing in life, as the saying goes, is free. Mutual funds are no exception. Having your money managed by a team of professionals comes with a cost. There are two main types of fees in the mutual fund world:
- The Management Expense Ratio (MER): This is expressed as a percentage and represents the fees you will pay to the manager. If a fund has an MER of 1.5%, that generally means if you have $10,000 of assets in it you will pay $150 per year as a management fee.
- Front or Back-End Load: With some funds, there is a sales charge when you buy or sell the fund. If you are charged this fee at the beginning, it’s called a front-end load, and if you’re assessed the fee when you sell, it’s a back-end load. It’s important to note that not all mutual funds have these types of sales charges: these are called “no-load funds”.
Tips for investors
If you are considering buying a mutual fund, there are some things you’ll want to keep in mind:
- Think about your objectives:
It’s important to give thought to what you want to achieve with your money and how much risk you are willing to take. Some funds are quite volatile, while others are less so. If you are going to buy a fund, you want the product to match your goals and risk tolerance.
- Think about your personal values:
The variety of types of mutual funds available also allows you to consider what matters to you. There are mutual funds that incorporate environmental sustainability, social responsibility and corporate governance (ESG funds) factors into their investing strategy. Choosing investments that are consistent with your financial goals and personal values may lead to greater satisfaction with your investments.
- Don’t be afraid to shop around:
You shop for food, clothes and even a car, so why only look at one mutual fund. Learning about a number of funds can help you find the fund or funds that meet your objectives and/or values.
- Consult with a financial advisor:
Trusting a financial advisor to help you select the right mutual funds can save time and hopefully improve your returns. In the U.S., Foresters Financial has representatives that are dedicated to implementing research-driven investment strategies that help investors mitigate risk and reap the benefits of solid, long-term performance.
Even if you already own mutual funds, it’s never a bad idea to review them and make sure they suit your existing goals. Just because you’re currently invested in a particular fund does not mean you have to stay with it for life.
This article was prepared by the author in his personal capacity. The information and views expressed in this article are those of the author alone and should not be attributed to Foresters Financial. The information provided in this article is for information purposes only and do not constitute professional advice to be relied upon. Please consult an investment professional before engaging in any transactions. Although reasonable effort is made to ensure the information is accurate, Foresters Financial shall accept no responsibility for its accuracy, reliability or validity.
416440 CAN/US/UK (06/18)