Mutual funds are pooled investments that benefit from diversification and professional management.
Mutual funds work by pooling the money of a number of investors and investing it in a variety of different investments such as stocks or bonds. The investor benefits from the professional management and the diversification of having their funds invested in a number of different underlying options. If the investments within the mutual fund do well, the fund increases in value, likewise if the investments in the mutual fund do poorly, the fund will lose value.
Mutual funds typically have a slightly higher return than Segregated funds, but do not have any guarantee attached. There are a huge number of companies that offer mutual funds, and many companies have a large variety of funds to choose from. It’s nearly unimaginable the number of available mutual funds through an independent advisor.
Because of the huge range of different kinds of mutual funds available, it is difficult to generalize about mutual funds. Some funds are low-risk with very conservative mandates and are appropriate for investors with a low-risk tolerance, other mutual funds are very high-risk with very high potential returns (and losses). Funds can have an array of different focuses, including regional, industrial sector, large cap (Big companies) or small cap (small companies).
Mutual Funds can be used within an RRSP or TFSA, but even if not tax shelter (within a RRSP or TFSA) they have generally have preferred tax status as they produce capital gains or dividends income vs interest income (which is taxed more heavily)
Mutual Funds, however, are subject to probate upon death, and all non-realized capital gains become taxable in the year of death.
- Huge variety of funds for nearly any type of investor
- High returns are possible
- Favourable tax treatment
- Benefits From professional management
- Cost of professional management is diluted amount all unit/share holders of fund.
- Principle and return are not guaranteed
- Subject to probate on death
- No beneficiary designation
- No protection from creditors