Mutual Funds
Finance

Understanding Mutual Funds

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Each unitholder is allocated a share – proportional to the number of units they hold – of the investment returns, which come from two sources:

Income (dividends or interest paid on fund securities)

Each fund is assigned to a manager who buys and sells investments in accordance with the fund’s objective: long-term growth, high short-term income, capital preservation, or any combination of the three.

Depending on its objective, a fund may be invested in stocks, bonds, money market instruments or a combination of these types of securities.

Advantages of Mutual Funds

Over the past two decades, mutual funds have become very popular due to the following advantages:

Diversification. A mutual fund alone can hold a much larger number of securities than most independent investors could otherwise afford, which helps to spread risk and reduce the effects of market volatility on returns. .

Professional management. The money invested 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.

Choice. Given the wide variety of mutual funds, investors are free to find the ones that best meet their investment goals.

Liquidity. Mutual fund shares can generally be bought and sold every business day, so investors can easily access their money.

Flexibility. Investors can easily switch their money from one fund to another as their needs and investment objectives change.

Types of Mutual Funds

Asset allocation funds are not invested in a single asset class but in several, especially in stocks, bonds and cash, which makes them diversified investments.

Asset allocation funds are intended to provide investors with a unique vehicle that combines growth and income objectives. To this end, these funds are invested in stocks (for growth) and bonds and cash (for income).

Thanks to this diversification, asset allocation funds suffer fewer losses in a stock market downturn because they are less exposed to a particular industry sector, which mitigates the effect of any downturns.

Asset allocation funds provide moderate to high capital preservation and offer moderate potential for short-term income and growth. They are therefore suitable for investors who are willing to accept some risk to obtain the capital growth they seek, while still counting on moderate short-term income.

Fixed Income Funds

These funds offer higher short-term income than money market funds, but less 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 yield through longer-term, lower-quality bonds, provide less capital preservation than fixed-income funds invested in lower-yielding but better-performing securities. quality.

Some fixed income funds aim to minimize risk by investing exclusively in securities that are fully guaranteed by the Canadian government with respect to payment of interest and repayment of capital.

Fixed income funds are suitable for investors who want to maximize short-term income while accepting a low level of risk. Capital growth is a secondary objective. These funds are generally popular with retirees and other investors looking for a regular source of income with low risk.

Canadian equity funds

Canadian equity funds invest in stocks of a wide range of Canadian companies. Investors who buy units of an equity fund virtually 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 primarily invested in securities of larger companies. Mid-cap equity funds are intermediate funds.

The objectives vary considerably from one Canadian equity fund to another:

Aggressive Growth Fund. These funds are invested in companies characterized by a spectacular growth potential (eg small companies which are in their initial public offering).

Growth funds. These funds are invested in companies known for their solid growth and potential for capital appreciation and capital gains.

Growth and income funds. These funds are invested in companies that offer modest growth prospects and a high dividend yield (eg utilities).

Stock market ups and downs affect equity funds. Although equities have traditionally outperformed other types of securities, there is no guarantee that this trend will continue in the short term. This is why Canadian equity funds are more part of a long-term investment strategy.

Global equity funds

If one of the goals of mutual funds is diversification, isn’t the best way to achieve that goal by investing in assets spread around the world? This is the logic of global equity funds. These funds are primarily invested in foreign equities, but may include some Canadian securities.

Since global equity funds can be volatile and more risky than Canadian funds – depending on global conditions, exchange rate fluctuations and other economic and political factors – their diversification compensates for country risk or political risks that an investor might encounter.

Global equity funds can be invested in large, mid or small capitalization stocks, or in specific industry sectors. There are several variants that should be clearly distinguished. Typically, a “global” fund is invested in a combination of Canadian and foreign securities. A fund qualified as “international” consists exclusively of foreign securities. A “regional” fund focuses on markets in a specific part of the world. Finally, so-called “emerging” funds favor developing countries and securities listed on the stock exchanges of these countries.

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