Mutual Funds: An Introduction

1. Mutual Funds: An Introduction

2. What is a Mutual Fund? • A mutual fund is made up of a selection of stocks, or bonds, or money market securities, and is owned by the investors but managed by an investment firm. • The investor's money becomes part of a pool of money that is used to manage the portfolio of securities. The content of the mutual fund will depend on the strategy, or investment objective, of the fund. • An investment company invests the money in stocks, bonds, T-bills, etc. depending on the type of fund

3. What is a Mutual Fund? • Mutual funds are sold in shares or units • Most investors don’t keep track of the shares or units they own, just the dollar value in the mutual fund and/or the fund’s % return • A mutual fund can increase in value because of capital gains (increase in the value of an investment or real estate, only realized upon sale), dividends and/or interest • Usually the dividends and interest are reinvested (to buy more stocks, bonds, etc.) so the value of the fund increases

4. Mutual Fund Shares • Mutual fund shares are sold to new investors and bought back from existing investors but are not listed for trading on a stock exchange. When you purchase mutual funds you would usually indicate how much money you would like to invest, not how many shares you want, because the share price is only updated at the end of the trading day. Referred to as the Net Asset Value, or NAV, the share price is calculated by dividing the market value of the fund's portfolio by the number of fund shares.

5. Public offering Price • The public offering price (POP) is the share price including any sales charges. While these charges may vary from nothing, up to 6 or 7%, they can also be: • paid when you buy the shares, known as front-end load, • paid when you sell them, known as back-end load, • paid over a period of years, known as a level-load, or • no-load, meaning that there is no sales charge on that fund at all.

6. Why Mutual Funds? • Accessibility • Instant diversification • Professional money management • Flexibility • Commission savings

7. Accessibility • Mutual funds have low investment minimums, making them accessible to nearly everyone • The minimum investment can be as low as $100 or $25 a month

8. Instant Diversification • Mutual funds typically hold 50 to 100 different investments • Diversification lowers your investment risk • That degree of diversification that would be difficult to achieve on your own

9. Professional Money Management • Investment professionals have the expertise to make wise investment decisions • They continually track financial markets

10. Flexibility • A wide variety of mutual funds are available to meet almost any investment need

11. Commission Savings • Because mutual fund managers are buying and selling large lots of securities at a time, commissions are minimized • It’s cheaper on a per share basis to sell large lots of shares instead of smaller lots

12. Your money has greater buying power because the fund contains potentially hundreds of different securities, reducing your own investment risk and providing some stability and growth potential with a broad portfolio. • The different types of funds are often referred to as a family of funds if all of the funds are managed by one investment firm. As your financial needs change over time you can move your assets within this family of funds, often with little or no charge. • Because you can sell your shares at any time mutual funds are a convenient investment as well. Some funds even allow cheque-writing.

13. What are the different types of Mutual Funds? • While there are many variations on mutual funds, there are four main types: • Equity Funds • Bond Funds • Global or International Funds • Money Market Funds

14. Equity Funds • Both growth and income equity funds invest in growth stocks and stocks paying dividends. Growth funds target capital appreciation and often focus on a particular industry or market sector.

15. Bond Funds • Yield current income by investing in corporate and government bonds. Lower-grade corporate bonds which may offer higher returns involve greater risk than higher-rated bonds. The mutual fund's prospectus will state which type of bond the mutual fund contains.

16. Global or International Funds • International funds will invest overseas or in the US. Risk is present because of fluctuating currencies and political and economic stability. Global funds invest in both foreign and domestic stocks or bonds.

17. Money Market Funds • These funds are looking for stability of principal along with some income and do so by investing in short-term debt securities. Often these funds are considered to be ultra-conservative.

18. There Must Be a Catch • Having investment professionals manage your money comes at a price • This is called a management fee • The fee is usually a percentage of the fund's average net asset value (the market value of the fund's portfolio divided by the number of fund shares)

19. How and Where Do You Buy Mutual Funds? • Mutual funds are sold through banks, trust companies and insurance companies • They are also available from investment advisors, financial planners and stock brokers • Mutual funds are not sold on the stock market • You do not have to be a stock broker to sell mutual funds • When you want to purchase mutual funds, you speak with a registered mutual funds representative

20. How and Where Do You Buy Mutual Funds? • That person will assist you in making a wise investing decision based on your age, goals, time horizon, investment knowledge, risk tolerance, etc. • They often use a questionnaire or other assessment tool to help them decide which investments to recommend • When you purchase mutual funds you would usually indicate how much money you would like to invest, not how many shares you want

21. What is a Prospectus? • A prospectus is a legal document that outlines the fund’s objectives, the organization responsible for managing the fund, the types of securities the fund’s manager may invest in, etc. • It also contains a disclaimer warning investors that a) their funds are not guaranteed or insured and b) that the fund’s past performance is not guarantee of future performance

22. Sources • Investopedia.ca • Stewart2011