INTRODUCTION

Mutual funds offer investors the benefits of economy, diversification, the expertise of a professional fund manager and timely reporting. When you invest money in a mutual fund, it is pooled with money from other investors. These pooled funds are directed into investments identified by the fund manager as likely to produce desirable results.

The Advantages of Mutual Funds

• Convenience of buying and selling
• Diversity in investments
• Professional management
• Automatic reinvestments
• Distribution options
• Telephone redemptions and transfers
• Easy to track and compare performance

The Role of Manager

Skilled managers can drive fund performance more strongly than other funds with similar objectives, and sometimes better than the stock or bond markets as a whole. But, it is the rare manager that can do so consistently, year in and year out – one reason why index funds (funds based upon the movement of an entire index, such as the Dow or TSX) have become increasingly popular.

Because a fund makes many investments, rather than just a few, small investors receive the advantage of diversification. This means that, even if some of the investments are performing less well than the manager’s expectations, others are apt to do better. A typical stock fund, for example, might own shares in more than 100 companies. Investors can gain added diversification by buying several different funds, with different objectives, and, of course, different managers.

A Quick Overview

Professional managers direct the investments of funds, continuously buying and selling. Investors are regularly credited with profits, or losses, in proportion to the number of units of a fund they own. Profits are either paid out as distributions, or reinvested in the fund.

For most funds, investors are required to make an initial investment of $1,000. Once your account is open, however, you can make additional purchases whenever you like, sometimes for as little as $100.

What to Look for…

Performance

Mutual fund performance is rated on how much the fund returns, whether the returns are consistent and how they stack up against the returns of comparable funds. Be wary of any fund whose high returns are based on one or two spectacular years scattered amongst eight or nine dull ones.

Consistency is an admirable trait in mutual fund performance.

Risk

Mutual fund risk is simply the likelihood of earning money or losing it. There is a considerable spread in mutual fund performance, and a certain lemming effect when one fund shows strong performance. A mediocre quarter, or even year that shows mediocre results, isn't necessarily bad if your fund has shown reasonable performance at other times, and presuming that you have invested for the long term. But, it is always a useful exercise to compare your fund’s performance against others, and to make sure that it is achieving your targets. It can be very unsettling to see your fund stuck in a low return rut, while other funds rack up large gains.

Costs

If you pay high commissions or fees, less of the money you put into your account is actually producing investment income. For example, if you pay a 4% front-end commission on each $1,000 you contribute, only $960 of your capital may actually be invested on your behalf. This means you’ve paid $40 on a $960 initial investment – your real front-end commission is, therefore, ($40/$960) x 100% = 4.16%.

Open-Ended vs. Exchange-Traded Funds

In an open-end fund, the more you – and other investors – put in, the larger the fund grows. You can invest directly, by mail, or through Qtrade Fund Management.

Exchange-Traded Funds ("ETFs") are traded on the major exchanges like stocks. ETFs are passive funds that track their related index.

Load vs. No-Load Funds

If you buy a mutual fund through a broker, it will probably be a load fund, which means you pay a commission. With a front-end load you pay when you make a purchase, and sometimes on your dividend reinvestments as well. With a back-end load you pay when you redeem, or sell, your units. Fund load rates range from 2% to 8.5%.

No-Load funds, which you buy directly from the mutual fund company, have no commissions – but some funds may charge annual fees to cover sales and marketing costs. It is important to note that all funds have annual expense fees.

Global Investing

Most experts agree that international investing is smart, both as a hedge against slow times at home and to take advantage of strong economies abroad. But investing overseas can be complicated, for reasons ranging from local economic knowledge to currency values and taxation policies. Funds handle these issues for you, making the process easier. Small wonder it is a popular choice for investors who want to add global markets to their portfolios.

Dollar-Cost Averaging

Dollar-cost averaging means investing a fixed dollar amount every month, no matter what's happening in the financial market. That way, the price you pay evens out over time. Plus, it's assurance that you will never pay only the highest (or lowest) price.

For example, if the price per unit varies over a year from $10.65 to $8.45, you will have bought some units high and some low. In the long run, you may come out better than by trying to pinpoint the moment the price hits bottom, or, conversely, tops out. Dollar-cost averaging doesn't mean, however, that you can't lose money, or that you wouldn't have been able to make more money if you had invested large amounts at the beginning of a market rise.

When Should You Invest?

Almost anytime, but if you own the fund in a taxable account, avoid investing just before a stock fund makes its annual capital gains and income distributions, which is usually in December. This is to avoid incurring a tax liability on the distribution of income for the entire year while owning the fund for only a short period of time.