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What is a mutual fund?

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Mutual funds invest in stocks, bonds and other asset classes that are owned by a group of investors and managed by fund managers. You can own a small part of a mutual fund by buying units, Then the fund manager invests the money in different

investment opportunities.

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Thinking of investing in mutual funds?

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Mutual funds offer you several advantages.

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• Diversification
  The main benefit of investing in mutual funds is diversification. Diversity in your portfolio can help increase your potential returns and reduce overall risk. The more diversified your portfolio, the lesser the impact once volatility occurs within the markets.

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• Professional management
  Investors purchase mutual funds as a result of a lack of time or the expertise to manage their own investments. Access to an experienced fund manager can help you save time.

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• Liquidity
  With a mutual fund, you can have easy accessibility to your money. You can request to sell your units and convert your investment into cash at any time.

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Types of mutual funds?

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• Bond funds
  Bond mutual funds offer investors relatively low market risk. Bond mutual funds are subject to capital gains and losses, depending on interest rates.

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• Mortgage funds
  Mortgage funds can offer investors a regular income. Mortgage fund terms are relatively short-term (five years or less), making them less risky.

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• Dividend funds
  Dividend funds have the goal of tax-advantaged income with capital appreciation. These funds invest in preferred shares and high-quality common shares that pay dividends.

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• Balanced funds
  Balanced mutual funds offer investors a mix of income and capital appreciation. These funds hold a combination of fixed-income investments (bonds) as well as common shares (stock) for diversification.

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• Equity funds
  The objective of equity mutual funds is capital growth, investing is common shares (stock). In general, equity funds are seen as more aggressive. The more aggressive the investment approach, the higher the potential risk and greater potential for capital growth.

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• Specialty equity funds
  Some investors like to get exposure to specialty areas that they feel have the potential to outperform the overall markets. These types of mutual funds invest in specialized markets or industries such as natural resources, real estate, and technology, which, although subject to volatility, may provide increased opportunities for growth over the long term.

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• International funds
  Some of the best investment opportunities are outside of Canada.

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Difference between open-end and closed-end funds?

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The term open-end and closed-end refers to whether or not a mutual fund issues an unlimited or limited number of units.

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• Open-end funds
  Most mutual funds within the markets are open-end. Open-end funds allow investors to own a share of a diversified portfolio of investments managed by professional fund managers. There is no limit to the number of units available. Units of an open-end fund can always be redeemed for the Net Asset Value Per Share (NAVPS).

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• Closed-end funds
  Closed-end funds have a fixed number of units that are generally traded like shares on a stock exchange. Closed-end funds have a NAVPS but they do not necessarily trade at their NAVPS. Their value is frequently less than their NAVPS. In this instance, when a closed-end fund is trading at a "discount," an investor may be able to buy a fund for less than the sum of its parts.

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What are the risks involved with mutual funds?

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The risks depend on the funds you select. Investors must keep in mind that mutual funds differ from other types of investments and should always be considered long-term investments.