What are mutual funds?
We all want to benefit from the stock market, but not everybody feels comfortable buying stocks directly. This is where mutual funds come in handy. They’re a way to invest in the stock market without picking the assets yourself.
A mutual fund is a “pooled investment,” pooling together money from many investors—possibly thousands—to buy a portfolio of securities. Investors buy “units” that represent their ownership in the fund and give them indirect exposure to the securities held by the fund.
The value of each unit you own increases or decreases daily based on the underlying portfolio’s performance. For example, if you own 10 units worth $50 each, then the total value of your investment is $500—$50 multiplied by 10. If the fund’s portfolio gains 1% (net of fees), then the total value of your investment would increase by 1% to $505.
You can hold mutual funds in registered and non-registered investment accounts. Examples of registered accounts include registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), and they allow you to hold your investments on a tax-deferred or tax-free basis, as applicable.
What’s the difference between mutual funds and ETFs?
Mutual funds and ETFs have much in common, plus some crucial differences. They’re both types of pooled investment funds that offer investors diversification, convenience and professional management for a fee. The fee charged is the fund’s management expense ratio (MER), and is a percentage of the assets invested.
Mutual funds and ETFs are bought and sold differently.
- ETFs are bought and sold on an exchange, just like stocks. The price of an ETF share may fluctuate from one moment to another in the course of a trading day, just like the prices of stocks do.
- Mutual funds are bought and sold through either a dealer or a stock broker. The price of a mutual fund unit—called the “net asset value per share” (NAVPS)—is calculated just once each weekday, at 4 p.m.
Mutual fund MERs are typically higher than comparable ETFs, because investors receive advice from a financial advisor. While the decision to work with an advisor or not depends on your personal circumstances and preferences, research has shown that working with an advisor could potentially create up to 2.3 times more wealth over time.
Here are other factors to consider when choosing your investments:
