Mutual Funds | Understanding the basics of mutual funds
Mutual funds or mutual funds are based on a simple principle: pooling money from many investors – unitholders – and investing in a variety of securities (stocks, bonds, and instruments, money market).
Each unitholder is allocated a pro rata share – proportionate to the number of units held – of investment returns from two sources:
- Income (dividends or interest paid on fund securities)
- Capital gains or losses (from the sale of securities held by the fund)
Each fund is assigned to a manager who buys and sells the investments in accordance with the Fund’s objective: long-term growth, high short-term income, preservation of capital, or any combination of the three.
Depending on its purpose, a fund may be invested in equities, bonds, money market instruments or in a combination of these types of securities.
- Asset Allocation Fund
- Fixed income fund
- Canadian Equity Fund
- Global Equity Fund
BENEFITS OF MUTUAL FUNDS
Over the past two decades, mutual funds have become very popular because of the following benefits:
A mutual fund can by itself holds much more securities than most independent investors could otherwise afford, which helps to spread risk and reduce the effects of market volatility on returns.
Money in a mutual fund is managed by specialists who make day-to-day investment decisions based on extensive research, sophisticated software, market information, and their own experience.
Given the wide variety of mutual funds, investors have the flexibility to find the ones that best meet their investment objectives.
Mutual fund units can usually be bought and sold every business day, so investors can easily access their money.
Investors can easily transfer money from one fund to another as their investment needs and goals change.
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TYPES OF MUTUAL FUNDS
Asset Allocation Fund
Asset allocation funds are not placed in a single asset class but in many, particularly in equities, bonds, and cash making them diversified investments.
The asset allocation funds are designed to provide investors with a single instrument that combines growth and income objectives. To this end, these funds are invested in equities (for growth) and bonds and cash (for income).
As a result of this diversification, asset allocation funds experience fewer losses in the event of a downturn in the stock market as they are less exposed to a particular industry, thereby mitigating the effect of potential downside.
Asset allocation funds provide moderate to the high capital preservation and offer the moderate potential for short-term income and growth. They are therefore suitable for investors who are prepared to accept certain risks in order to achieve the desired capital growth while continuing to rely on moderate short-term income.
Fixed income fund
Fixed income funds are primarily invested in bonds and preferred shares that pay a fixed dividend. These funds offer higher short-term income than money market funds but lower capital preservation. Their price is generally more stable than that of equity funds.
Capital preservation and returns vary significantly from one fixed income fund to another. High yield funds, which seek to maximize returns through lower-quality, longer-dated bonds, provide lower capital preservation than fixed-income funds invested in lower-yielding, better-performing securities. quality.
Some fixed income funds seek to minimize risk by investing exclusively in securities that are fully guaranteed by the Government of Canada for the payment of interest and the return of capital.
Fixed income funds are suitable for investors who want to maximize income in the short term while accepting a low level of risk. Capital growth is a secondary goal. These funds are generally appreciated by retirees and other investors looking for a low-risk, regular source of income.
Canadian Equity Fund
Canadian equity funds are invested in the stocks of a broad range of Canadian companies. Investors who buy shares of an equity fund become co-owners of each of the securities in the fund’s portfolio.
Some Canadian equity funds invest in companies based on, among other things, their market capitalization (the market value of all their outstanding shares). In general, small-cap Canadian equity funds are invested in small or highly specialized companies, while large-cap equity funds are largely comprised of large-cap stocks. Mid-cap equity funds are intermediate funds.
Goals vary considerably from one Canadian equity fund to another:
Dynamic Growth Fund
These funds are invested in companies with dramatic growth potential (for example, small companies in their initial public offering).
These funds are invested in companies known for their strong growth and potential for capital appreciation and capital gains.
Growth and Income Fund
These funds are invested in companies that offer modest growth prospects and a high dividend rate (eg utilities).
Increases and declines in the stock market have repercussions on equity funds. Although equities traditionally outperform other types of securities, there is no guarantee that this trend will continue in the short term. That’s why Canadian equity funds are more part of a long-term investment strategy.
Global Equity Fund
If one of the goals of mutual funds is diversification, is not the best way to achieve that goal to invest in assets around the world? This is the logic of global equity funds. These funds are primarily invested in foreign stocks but may include some Canadian securities.
Since global equity funds can be volatile and riskier than Canadian funds – depending on global conditions, exchange rate fluctuations. And other economic and political factors, their diversification offsets the country’s risks or the risks they face. Political risks an investor might encounter.
Global equity funds may be invested in large, medium or small capitalization stocks or in specific industries. There are several variants that should be distinguished. Generally, a “global” fund is placed in a combination of Canadian and foreign securities. An “international” qualified fund consists exclusively of foreign securities. A “regional” fund is focused on the markets of a particular part of the world.
Finally, so-called “emerging” funds favor developing countries and listed securities in these countries.
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