Mutal Funds Flashcards
What is a mutual fund?
It’s a type of investment fund.
Collection of investments
Stocks
Bonds
Other funds or exchange-traded funds (ETFs)
Commodities (gold, silver, pork bellies, etc.)
Management
Funds are controlled by a Fund Manager, an expert investor or a team of investors who make decisions on when to buy and sell investments within the fund.
How do you Invest in a Mutual Fund?
Units vs. Shares
Instead of buying shares, a mutual fund investor purchases units of the fund
Purchase by the Amount of Money you want to spend, not the number of shares
Income is earned by
Capital Gains - selling for more than you paid
Distributions (from dividends, interest earned, etc.)
Note that you can also lose money on mutual fund investments.
What is Diversification?
There are many ways to Diversify through mutual fund investing.
Type of Investment (equity vs. fixed income)
Geography (focus on certain countries or regions of the world)
Investment Style (eg. Income, Growth, Balanced, Index)
Company Size (eg. Large Cap. vs. Small Cap.
What are Management Expense Ratio?
MERs are costs represented as a percentage of your assets in the fund that are paid annually.
Most MERs for mutual funds in Canada cost 2-3% for equity-based and “actively managed” funds
What are Dollar Cost Averaging?
Making regular payments (for instance $100.00 per month), regardless of the price of the investment.
When the price of the mutual fund is higher, you get less units.
When the price of the mutual fund is lower, you get more units
Over time, the average price per unit becomes smaller and smaller, which lessens the risk of price fluctuations over time.
This can easily be done with mutual funds
How Do I Make A Mutual Fund Investment?
You need an account with a mutual fund company, broker or bank
You need to be 18
You need to have a minimum investment in the fund, listed in the fund’s Prospectus
This depends on the fund, but it’s often $500.00 or $1000.00
Note that some funds require much more money for an initial investment
You need to read the fund’s prospectus – a document outlining what type of fund it is, who runs it, how much it costs, etc.
Mutual fund companies have to produce a prospectus, and as a potential investor, you have to agree to it.
Prospectuses are approved and reviews by the Ontario Securities Commission
What are the advantages of Mutual Funds?
Diversification
Managed by expert investors (expertise)
Liquidity
Ease of entry (low minimum investment)
Convenience (automatic payment plans)
Access to investments usually available to larger investors
It’s regulated (OSC)
Dollar-Cost Averaging
What are the disadvantages of Mutual Funds?
Loads (unless it is a no-load fund)
MERs (Mutual Funds – a most expensive type of investment)
Risk of financial loss
Less control over your investments
Less predictable income
