Mutual funds: an easier way to invest
A
mutual fund is a pool of money invested by many investors
and managed by professionals.
When you buy a mutual fund, you’re letting a professional
portfolio manager do your work for you. Instead of you spending
hours and hours researching the best stocks or bonds or whatever
investments that interest you, you’re letting an expert
do it.
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"I use not only all the brains
I have but all I can borrow"
Woodrow Wilson |
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Professional managers also have the discipline and experience
that are so necessary for success. And in exchange for all
this – their time and efforts and ongoing expertise
– they earn a fee that is part of the expense of managing
the fund.
Whatever your goals, you can achieve them with
mutual funds
There’s a mutual fund that’s right for every
investor. From the inexperienced individual investor with
a few thousand dollars to a gigantic employee pension fund
with many millions, there’s a fund to suit their purpose.
Mutual funds provide significant advantages to most investors.
In fact, for many investors, mutual funds will be the key
component in their portfolio.
We know how important diversification and asset allocation
are to every investor. A mutual fund offers you both with
a fraction of the investment you’d need if you were
acting on your own, to say nothing of the time and effort
involved.
Mutual funds allow you to participate in many asset classes,
geographic areas, industry sectors and investment styles.
Whatever kind of portfolio you want – from ultra conservative
to ultra-aggressive – it can be created with mutual
funds.
Here are just a few of the types of funds available:
Balanced Funds - These funds
offer a mixture of safety, income and capital appreciation.
They hold fixed income securities for stability and income,
and a wide variety of common stocks for diversification, dividend
income and growth potential. Balanced funds let you participate
in the growth that stocks can provide while earning income
through bond holdings. At times they also hold a small amount
of cash for liquidity.
Equity Funds - The primary
objective of an equity fund is capital growth, although dividends
may contribute to the total return. They vary widely by their
level of aggressiveness - the more aggressive the investment
approach, the higher the risk and the greater potential for
capital growth.
Bond Funds - Income and safety
of principal are the main objectives. However, you should
be aware that their values can depend on interest rate movements
and they will be subject to capital gains and losses.
Dividend Funds – Their
goal is to earn tax-advantaged income with some possibility
of capital appreciation. These funds invest in Canadian preferred
shares and high quality common shares that consistently pay
dividends. The income from these funds qualifies for the dividend
tax credit, providing an important tax advantage to investors.
Mortgage Funds - Goals are
income and safety. They’re not as risky as bond funds
because mortgage terms are usually relatively short (five
years or less) so their values will not be as sensitive to
interest rate changes.
Specialty Equity Funds - Some
investors like to diversify into specific areas that they
feel will outperform the overall markets, such as natural
resources, real estate, science & technology, precious
metals. Specialty funds invest in these markets or industries.
And although they are subject to volatility, they may provide
excellent opportunities for growth over the long term.
International Funds - More
and more investors are realizing that the best investment
opportunities often lie outside of Canada. As a result, international
funds are gaining in popularity.
With this kind of wide variety available you can enjoy a
level of diversification – and risk reduction –
that would require hundreds of thousands of dollars to achieve
on your own. With mutual funds you can easily do it with just
several thousand.
You can make money with mutual funds in two ways:
You can accumulate distributions – the earnings of
the mutual fund. Mutual funds earn money through capital gains,
dividend payments or interest income. These returns (when
they are made – they are not guaranteed!) are distributed
to investors on a regular basis. You can also choose to reinvest
the distribution, increasing the number of mutual fund units
you hold.
You can sell your units for more than you paid. As the value
of the investments in the fund increase in value, fund units
increase in value. You can earn a capital gain by selling
your units for more than you paid.
A summary of the advantages of mutual funds
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You get easy and convenient access to a broad range of
investments in Canada and around the world.
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You achieve instant diversification because funds are
made up of many individual investments. For example, one
equity fund might hold 100 or more different stocks in
its portfolio.
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You can achieve a level of diversification that would
be impossible on your own, unless you have substantial
dollars to invest.
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You can enjoy the benefits of a professional money manager
looking after your investments, even if you don’t
have a six-figure portfolio.
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Mutual funds are highly liquid investments so you can
get your money out when you want it.
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If you believe that a particular industry sector is going
to grow, i.e., oil and gas, precious metals, telecommunications,
etc., you can invest in it without having to research
and choose any individual stocks.
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Mutual funds are a way to enjoy the growth potential
of equities while avoiding the generally higher risk of
investing in individual equities
Like any investment, mutual funds have pros and cons. However,
on the whole, mutual funds are an excellent type of investment
for just about all investors.
They can be right for you even if you have limited experience,
limited time or limited capital. They’re also perfect
if you have years of experience, plenty of time and unlimited
capital. In other words, whatever kind of investor you are,
whatever your goals, you can find a solution through the more
than 2,000 mutual funds that are available today in Canada.
You should keep in mind that we’ve only talked about
traditional, actively managed mutual funds. There is another
category of mutual funds – such as index funds and exchange
traded funds – which are “passively managed”
and that you may want to learn more about.
If you’d like to know more about mutual funds you
can
click
here to find the RBC financial planning professional closest
to you.
Important information about our financial planning services can be found at the bottom of our
homepage.
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