What are mutual funds?

Some mutual funds invest only in stocks, others only in fixed income (mainly bonds). Balanced funds own both, often adjusting the relative proportions according to market conditions. You can use mutual funds to pursue a wide range of investment strategies. Some funds focus on specific geographic areas, like Europe or Asia. Others focus on sectors such as natural resources or high tech.

Mutual fund companies file prospectuses with securities regulators describing each fund’s investment strategy. They are required to disclose holdings and performance results on a regular basis. Each fund publishes a Fund Facts document summarizing key details about the fund, including a description of the strategy, risk rating, top 10 holdings and recent performance.

How mutual funds are managed  

Historically, mutual funds were all actively managed, with managers doing research and selecting individual stocks and bonds. More recently, passively managed index funds have become popular. An index fund is designed to replicate an index such as the S&P/TSX Composite Index or S&P 500.  

How to buy mutual funds in Canada

You can purchase mutual funds from investment firms, brokerages, banks, trust companies and other providers. The cost of owning a mutual fund is expressed as the management expense ratio or MER. This includes operating costs like trading, fees paid to the fund manager for their services, tax and sometimes a trailing commission.

The trailing commission, or trailer, is an amount the fund company pays to your investment advisor for providing advice and services. Series D funds are designed for self-directed investors. They don’t charge trailing commissions because self-directed investors do not receive advice.

Example: “Barbara expected Japanese stocks to outperform North American ones, so she bought a mutual fund that invested exclusively in Japan. This saved her the time and effort required to do her own research and allowed her to benefit from the expertise of professional fund managers.”

Read more about mutual funds:

• Switching from mutual funds to ETFs
  Thinking about switching from high-fee mutual funds to low-fee exchange-traded funds? An investor advocate walks through the steps—and precautions—to follow when you’re ready.
• Can I put mutual fund fees back in my account?
  Investing fees (MER, TER, trailing) are always hard to swallow, but what if there was a way to manage with mutual funds? Take a read to find out.
• Converting mutual funds: The benefits, the risks and the costs
  How to deal with DSC fees when redeeming mutual funds and find out if it’s worth paying the fees. Sometimes it’s about luck.
• What is a deferred sales charge?
  Mutual fund companies in Canada used to have deferred sales charges (DSCs) for some of their funds. Learn what happened to DSCs in the MoneySense Glossary.
• Should you sell mutual funds with DSC charges?
  Katrina could lose thousands and wonders if there’s a better way

About MoneySense Editors

MoneySense editors and journalists work closely with leading personal finance experts in Canada. Since 1999, our award-winning magazine has helped Canadians navigate money matters.

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