Everything you need to know about mutual funds
Investing in mutual funds can help you reach your financial goals. To help you make an informed choice, here's everything you need to know about this investment product.
Whether you're saving for a down payment on a home, a trip to Europe, or want to grow your retirement savings, it can be a good idea to adopt an investment strategy that involves mutual funds. Here's everything you need to know about this investment vehicle.
What is a mutual fund?
When you invest in a mutual fund, you pool your money with other investors (also known as unitholders) to purchase a variety of securities such as stocks, bonds, and money market instruments. In return, you get a number of shares that are proportional to your investment.
You can hold units in registered accounts such as RRSPs, RRIFs, TFSAs, and RESPs, or in non-registered accounts such as investment accounts.
Each fund has a portfolio manager who is in charge of making investment decisions to increase the value of the fund based on the fund's objective. For example, this may involve preserving the amounts invested, seeking a balance between generating regular income and growing the amounts invested, or growing the amounts invested as much as possible.
At the end of each period, investors receive returns on their investments. These distributions may consist of dividend income, which is generated by public companies, or interest income, which is generated by fixed-income securities. A capital gain or loss may also result from the sale of fund units.
Key benefits of mutual funds
Mutual funds are popular with investors because they offer many benefits.
By pooling even small amounts of money with other investors, you'll have access to a much wider range of investments than if you were to invest independently.
By investing in a diversified portfolio made up of a variety of securities, you'll mitigate your risk and reduce the effects of market volatility on your returns. You can also diversify your portfolio by industry, geographical location, or asset class.
3. Professional management
Mutual funds are managed by experienced portfolio managers who actively monitor the markets and make the best decisions to grow your investments.
Mutual fund units can generally be bought and sold every business day, thereby granting you easy access to your money. However, keep in mind that the value of your investments may decrease between their date of purchase and date of sale.
Certain mutual funds also let you reinvest your distributions into other mutual fund units or transfer your money to other funds if your investment needs or objectives change.
The impact of management fees
Regardless of the type of investments you make, it's crucial to consider the different fees associated with mutual funds. These fees, also known as the management expense ratio (MER), include operating and administrative expenses, investment management fees, advisor commissions, and taxes.
Management fees may differ from one fund to another, depending on the fund's components or management style. It's important to do your research and consult the Fund Facts or prospectus. This will enable you to compare the products available on the market.
Every dollar that goes toward management fees is one less dollar you get to invest. From this perspective, the MER can have a major impact on your returns, as well as on your savings over the long term. For instance, if you're paying a 2% management fee, you will have to deduct this percentage from your return. That means an 8% return will be reduced by 2%, and you'll be left with a 6% return. That being said, the return that's posted is always the return you'll get after the MER has been deducted.
Returns and mutual funds
Generally, there is a positive correlation between risk and return. A low-risk investment will tend to yield a lower return. Conversely, a riskier product will typically offer a better return.
It is also believed that the riskier an investment is, the longer it may take to generate a return. An investor with a short-term investment horizon and objective will prefer less risky securities to preserve their capital.
However, performance isn't the only thing to consider when building a savings strategy. By saving early, an investor will earn interest on their initial investment. These returns will then be reinvested and earn their own interest. This is called compound interest.
How to invest in FlexiFonds mutual funds
You can open an account with FlexiFonds online or by phone. This savings solution presents an affordable service to investors, in addition to giving them access to investment products with a strong focus on Québec that support the local economy, with some of the lowest management fees on the market.
01 Before investing your money, the first step involves gaining a better understanding of your feelings about investing by establishing your investor profile. This helps to establish your risk tolerance, which will be reflected in the mutual funds you will invest in.
02 To better understand your feelings about investing, you will need to determine your investment horizon and objective. For instance, your investments will be different depending on whether you're saving for a house you'd like to buy in three years, or whether you're saving for retirement 20 years from now. Your financial situation also needs to be considered. Do you have a financial cushion to fall back on in the event of hard times? Is your income stable?
03 Finally, your risk tolerance will be based on your ability to ride out fluctuations in returns, and perhaps even a decline in the value of your investments.
By saving with FlexiFonds, you'll have access to three mutual funds depending on your investor profile: Conservative, Balanced, or Growth. It's important to review your situation whenever you undergo a life-changing event, such as the birth of a child, getting a promotion at work, or buying a second home. With FlexiFonds, you will be asked to review your profile every 24 to 36 months.
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The FlexiFonds are distributed solely in Québec by FlexiFonds de solidarité FTQ Inc. a mutual fund dealer wholly owned by the Fonds de solidarité FTQ. FlexiFonds de solidarité FTQ inc. does not distribute any other mutual funds. Please consult your advisor and read the prospectus and fund facts before making an investment. The FlexiFonds are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer or by the Autorité des marchés financiers. The mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.