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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Simple information on diversifying your investments with mutual funds
With mutual funds, beginning and experienced investors can afford to invest in a wide range of securities by pooling their money with others’ and splitting the profits. Mutual Fund Investing For Canadians For Dummies helps you makes sense of these funds, start investing, and create a plan to meet your financial goals. With this easy-to-understand guide, you can weigh the pros and cons of mutual funds to decide if they’re right for you. Then follow step-by-step instructions for investing your money in reputable funds—with information specific to the Canadian market.
- Learn what mutual funds are and how they’re different from hand-picking your own stocks and bonds
- Understand the risks and benefits of mutual funds so you can determine whether they fit with your financial goals
- Make a solid investment plan and craft your fund portfolio
- Consider hedge funds and other managed options for rounding out your investment portfolio
Mutual Fund Investing For Canadians For Dummies is great for beginner investors looking to learn more about the benefits of mutual funds and get up to speed on the latest information.
Das E-Book können Sie in Legimi-Apps oder einer beliebigen App lesen, die das folgende Format unterstützen:
Veröffentlichungsjahr: 2024
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Mutual Fund Investing For Canadians For Dummies®
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Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: Meet the Mutual Fund
Chapter 1: Mutual Funds 101
Getting the Scoop on Mutual Fund
Finding Your Type (of Funds)
Figuring out Where to Buy
Chapter 2: Buying and Selling Basics
Reasons to Buy Funds
Perils and Pitfalls of Funds
Load versus No-Load — The Great Divide
Chapter 3: Paperwork and Your Rights
Getting Set Up
Dealing with Prospectuses
Introducing the Management Report of Fund Performance
Understanding Your Account Statement
Reading Annual and Semi-Annual Financial Statements (Or Annual Reports)
Chapter 4: Building Your Financial Plan
Looking at Your Long-Term Financial Future
Setting Your Financial Priorities
Understanding What Type of Investor You Are
Understanding That Investing Is an Inexact Science
Remembering the Importance of Diversification
Portfolios for Your Type of Investing
Chapter 5: Beyond Mutual Funds
The Good Old GIC: You Know Where You Sleep
Bonds: Stable Securities for Every Portfolio
Stocks: Thrills, Spills, and Twisted Wreckage
Managed Products: A Fee Circus
Part 2: Buying Options: Looking for a Helping Hand
Chapter 6: Discount Brokers: Cheap Thrills
What Are Discount Brokers?
Why Discount Brokers Are a Great Place to Buy Funds
How to Pick a Discounter
What’s Wrong with Discount Brokers?
Relying on robots to manage your money
Chapter 7: Banks: The Fast Food of Funds
Buy Where You Bank
Buyer Beware: Shortfalls in Bank Offerings
How Banks Pulled Up Their Socks
A Few Gems from the Banks
Chapter 8: Stockbrokers, Financial Planners, and Advisors Aplenty
Alphabet Soup: Figuring Out All Those Titles
Deciding Whether to Pay a Fee or a Commission
Exploring Important Qualifications
The right way to pick an advisor
The wrong way to pick an adviser
Chapter 9: Buying Direct: Five Independents that Sell to the Public
Getting Started with Direct Sellers
Enjoying the Benefits of Dealing with an Independent No-Load Company
Weighing the Drawbacks of Going Direct
Sizing Up the Five Independents
Part 3: The Fund Stuff: Building a Strong Portfolio
Chapter 10: Equity Funds: The Road to Riches
Making Investing in Stocks Simple
Deciding How Much to Bet on Equity Funds
Knowing What Return to Expect from Your Funds
Picking a Fund: The Basics
Avoiding a Lemon
Chapter 11: Heirloom Equity Funds: The Dull Stuff that Will Make You Wealthy
How Many Equity Funds Do You Need?
Global Equity Funds: Meet Faraway People and Exploit Them
Canadian Equity Funds: Making Maple-Syrup-Flavoured Money
Chapter 12: Las Vegas–Style Equity Funds: Trips You Don’t Need
Small and Mid-Sized Company Funds: Spotty Little Fellows
Regional Equity Funds: Welcome to Bangkok — or Hong Kong?
Sector Funds: Limitations Galore
Chapter 13: Balanced Funds: Boring Can Be Good
Understanding Balanced Funds
Reviewing the Problems with Balanced Funds
A Simple Plan for Picking the Right Canadian Balanced Fund
Global Balanced Funds — As Good as It Gets?
Tactical Balanced Funds: Pay Me to Lose Your Money
Chapter 14: Bond Funds: Boring Can Be Sexy, Too
Some Great Reasons to Choose Bonds
How Much Do I Need in Bonds?
How to Pick a Good Bond Fund in 30 Seconds
How Inflation Affects Bonds
Index Funds and Bonds: A Match Made in Heaven
Long Bonds: Grabbing the Lion by the Tail
Short-Term Bond Funds: Playing It Safe
High-Yield Bond Funds: Naked Bungee-Jumping
Bonds Outside Canada
Chapter 15: Exchange-Traded Funds and Index Funds: The Art of Owning Everything
Buying the Whole Enchilada: The Ups and Downs of Indexing
Fitting ETFs and Index Funds into Your Portfolio
Evaluating Regular Mutual Fund and ETF Performance
Understanding Why Fund Managers Seldom Beat the Market
Overcoming Some Salespeople’s Dislike of Index Funds and ETFs
Buying ETFS and index funds
Straying from the Norm: Specialized Index Funds and ETFs
Chapter 16: Dividend and Income Funds: Confusion Galore
What Are Dividend and Income Funds?
Are Dividend and Income Funds Right for You?
The Appealing Tax Implications of Dividends
How to Select a Winning Dividend Fund
The Times Are a’Changin’: The Fall of Preferred Shares and Income Trusts
Chapter 17: Money Market Funds: Sleepy but Simple
Digging into Money Market Funds
Checking Up on Your Money Market Fund
Deciding if Money Markets Are All They’re Cracked Up to Be
Selecting Winning Money Market Funds: Pick Only the Plums
Chapter 18: Fund Oddities: Strange Brews Sometimes Worth Tasting
Target Date Funds: A Gimmick that May Make Sense
ESG Funds: Once Obscure Securities Have Now Gone Mainstream
Labour-Sponsored Funds: Small Business, Big Tax Break — for Now
Funds with Trendy and Focused Mandates
Chapter 19: Segregated Funds: Investing on Autopilot
Hang On to Your Hats: The Rise of the Segregated Fund
Seg Fund Essentials
The Cost of Certainty
The “Deal” with Segs
To Seg or Not to Seg: Are They for You?
Chapter 20: Fund Packages: One-Stop Shopping
The Flavours Fund Packages Come In
What to Find Out Before You Buy
The Upside of Fund Packages
The Downside of Fund Packages
Steer Clear of the Hype
A Look at a Decent Fund Package
Part 4: The Nuts and Bolts of Keeping Your Portfolio Going
Chapter 21: The Places to Go for Fund Information
Independent Sources: Where to Get the Honest Goods
The Regulatory Jungle: When You Need Official Stuff
Fund Company Sites: Useful Information, But Mind the Context
Brokers and Planners: Only the Basics
Chapter 22: RRSPs and TFSAs: Fertilizer for Your Mutual Funds
Pour It in and Watch It Grow: Understanding RRSPs
The Really Tax Free Investment Account: TFSA
Where to Buy Your RRSP
The Beautiful Garden That Is the Self-Directed RRSP
The Most Fragrant Flower: Choosing Funds for Your RRSP
Chapter 23: Taxes: Timing Is Everything
The Wacky World of Fund Distributions
Taxes on Fund Distributions
Taxes When You Sell or Exchange
Index Funds and ETFs: A Tax-Efficient Investment
A Few More Ideas for Tax Savings
Part 5: The Part of Tens
Chapter 24: Ten Questions to Ask a Potential Financial Advisor
How Do You Get Paid?
What Do You Think of My Financial Situation?
Will You Sell Me ETFs, Index Funds, and Low-Cost, No-Load Funds?
What Will You Do for Me?
Can You Help with Income-Splitting and Tax Deferral?
Can I Talk to Some of Your Clients?
What Do You Think of the Market?
What Training Do You Have?
How Long Have You Been Doing This?
Can I See a Sample Client Statement?
Chapter 25: Ten Signs You Need a New Financial Advisor
Produces Rotten Returns
Pesters You to Buy New Products after the Firm Is Taken Over
Switches Firms Frequently
Keeps Asking for Power of Attorney or Discretionary Authority
Doesn’t Return Your Calls or Emails
Won’t Let You Invest in ETFs and Index Funds
Doesn’t Care about Your Overall Financial Plan
Suggests “Unregistered” Investments or Other Strange Stuff
Keeps Wanting You to Buy and Sell Investments
Won’t Abandon Pet Theories
Chapter 26: Ten Mistakes Investors Make
Diversifying Too Much
Diversifying Too Little
Procrastinating
Being Apathetic
Hanging on to Bad Investments
Taking Cash out of Your RRSP
Ignoring Expenses
Failing to Plan for Taxes
Obsessing about Insignificant Fees
Waiting until the Market Looks Better
Index
About the Author
Connect with Dummies
End User License Agreement
List of Tables
Chapter 1
TABLE 1-1 Growth of the Mutual Fund Industry in Canada
Chapter 2
TABLE 2-1 Canada’s 10 Biggest Fund Companies and How They Sell Their Funds
Chapter 4
TABLE 4-1 Suggested Portfolio for Savings (20% Money Market and 80% Bonds)
TABLE 4-2 Suggested Portfolio for Balanced Investors (55% Bonds and 45% Stocks)
TABLE 4-3 Suggested Portfolio for Growth Investors (25% Bonds and 75% Stocks)
Chapter 5
TABLE 5-1 How Inflation Destroys Money over Time
Chapter 6
TABLE 6-1 How to Contact the Discounters
Chapter 7
TABLE 7-1 No Longer Laggards: Bank Funds Are Performing Better
TABLE 7-2 A Conservative Portfolio Using Mostly Scotiabank Funds
Chapter 9
TABLE 9-1 Think One Percent Doesn’t Matter? That’ll Be $2,263 Please
Chapter 13
TABLE 13-1 Balanced Fund MERs
Chapter 18
TABLE 18-1 Fidelity ClearPath 2030 and 2050 Portfolios
Chapter 20
TABLE 20-1 Anatomy of a Fund Package: CIBC Managed Balanced Portfolio
Chapter 22
TABLE 22-1 TFSA Contribution Limits
Chapter 23
TABLE 23-1 What If You Take the Distribution in Cash?
TABLE 23-2 What If You Reinvest the Distribution?
TABLE 23-3 After tax eligible dividend income
List of Illustrations
Chapter 3
FIGURE 3-1: Management report of fund performance showing performance informati...
FIGURE 3-2: Management report of fund performance showing portfolio holdings in...
FIGURE 3-3: Management report of fund performance showing some of the financial...
Chapter 22
FIGURE 22-1: $6,000 invested at five percent for 25 years, untaxed and taxed va...
Guide
Cover
Table of Contents
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Copyright
Begin Reading
Index
About the Author
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Mutual Fund Investing For Canadians For Dummies®, 2ndEdition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
Copyright © 2024 by John Wiley & Sons, Inc., Hoboken, New Jersey
Media and software compilation copyright © 2024 by John Wiley & Sons, Inc. All rights reserved.
Published simultaneously in Canada
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Introduction
Canadians love their mutual funds. They’re the most popular investment by far in the country and will likely continue to be for some time. But while you may be holding funds in your portfolio, do you really know the ins and outs of this market? Did you know that a lot of funds come with high fees? That some advisors may have a vested interest in selling you certain kinds of funds over others? That there are a whole bunch of fund categories that typical investors should stay away from? That there may be other options, such as exchange-traded and index funds to consider? If you just buy the funds that are recommended by your bank or advisor, then probably not.
While there will always be a place for mutual funds in your portfolio, it’s a good idea to understand what you’re investing in before you buy. Whether you’re a newbie investor who wants to start saving for retirement or a savvy saver who wants to explore different investment options in greater depth, this book has something for you. It’s a great guide to mutual funds — and the investing world in general — for Canada’s investors.
About This Book
Tons of investment books are on the market, but many go into strategies or ideas that no regular investor needs to bother themselves with. A lot of writers also take the mutual fund, which has been around for decades, for granted, assuming everyone already knows all there is about this asset. Well, you know what they say about assuming things.
This book breaks down everything you need to know about mutual funds and broader investing into an easy-to-understand way. We cover a wide range of topics, some you may not use, others you’ll want to revisit as you go deeper on your investment journey.
Like all For Dummies books, ideas are organized in simple-to-follow fashion. We start with the basics and then get more complex as your knowledge expands. You can also flip to a particular section, for example on tax or registered retirement savings plans, if you want to get up to speed on a specific topic.
Here are just a few of the topics we cover in this book:
Get a good understanding of mutual basics. Discover how these funds are constructed, how they trade, how to make sure you’re getting a good one and more.
Find out the difference between discount brokerages, mutual fund firms, and banks, and how advisors or salespeople promote and sell these kinds of securities.
Understand the fees associated with mutual funds and how advisors are compensated for selling them. (This part of the book is very important!)
Get a handle on the wackier funds out there and other mutual fund alternatives.
Figure out how these funds are taxed.
Something else to note: Sidebars (shaded boxes of text) dig into the details of a given topic, but they aren’t crucial to understanding it. Feel free to read them or skip them. You can pass over the text accompanied by the Technical Stuff icon, too. The text marked with this icon gives some interesting but nonessential information about mutual funds.
Finally, within this book, you may note that some web addresses break across two lines of text. If you’re reading this book in print and want to visit one of these web pages, simply key in the web address exactly as it’s noted in the text, pretending as though the line break doesn’t exist. If you’re reading this as an e-book, you’ve got it easy. Just click the web address to be taken directly to the web page.
Foolish Assumptions
Despite what we know about assumptions, we have made a few about you and why you’re picking up this book:
You want to discover more about investing and have heard about mutual funds.
You want to expand your knowledge beyond the basics.
You want to find ways to grow your assets, while keeping as much money as you can inside of your portfolio and not in the hands of the government or salespeople.
You want to know a little more, but not too much, about the way the finance and investment industries work.
Ultimately, you want to save money for retirement and the many other goals you want to accomplish throughout your life.
You know a thing or two about investing, but want some guidance that cuts to the chase and doesn’t include jargon or mumbo-jumbo.
Icons Used in This Book
Throughout this book, icons in the margins highlight certain types of valuable information that call out for your attention. Here are the icons you’ll encounter and a brief description of each.
The Tip icon marks tips and shortcuts that you can use to make finding out about investing easier.
Remember icons mark the information that’s especially important to know. To siphon off the most important information in each chapter, just skim through these icons.
The Technical Stuff icon marks information of a more technical nature that you can normally skip over.
The Warning icon tells you to watch out! It marks important information that may save you headaches, and money, in the long run.
Beyond the Book
In addition to the abundance of information and guidance related to mutual funds that we provide in this book, you get access to even more help and information online at Dummies.com. Check out this book’s online Cheat Sheet. Just go to www.dummies.com and search for “Mutual Funds for Canadians For Dummies Cheat Sheet.”
Where to Go from Here
You don’t have to read this book all the way through but go ahead if you like! If you want specific information on, say, bond funds, flip to that chapter. If you want to learn more about index funds, then start there. A lot of great information is here no matter where you begin.
For instance, if you’re a beginner, start with Chapter 1, which outlines the mutual fund basics. If you already know about discount brokers and banks, jump to Chapter 10, which looks at equity funds, and continue from there. Want to learn a little more about tax-free savings accounts? Head over to Chapter 22.
After you’re done reading this book, you can find plenty of other For Dummies tomes that can help deepen your investment knowledge. We recommend ETFs For Canadians For Dummies, 2nd Edition (Wiley), which explores low-cost funds in greater depth.
Part 1
Meet the Mutual Fund
IN THIS PART …
Get the gist of the mutual fund world.
Find out why mutual funds may be right for you.
Understand the basic mechanics of buying and selling funds.
Start seeing how mutual funds can make you money.
Look at how mutual funds can fit into your financial plan.
Chapter 1
Mutual Funds 101
IN THIS CHAPTER
Understanding mutual funds
Looking at how funds can make you money
Identifying the four types of mutual funds
Knowing where to buy funds
There’s a good chance you or someone in your family already owns some mutual funds. They can seem complicated — especially today, given how many options there are on the market, which leads people to buy the first fund their financial planner suggests. All too often, Canadians end up disappointed with their funds’ performance, because they’ve been sold something that’s either unsuitable for them or just too expensive.
But not to worry! Building a portfolio of excellent funds is easy if you follow a few simple rules and use your own common sense. This stuff isn’t complex — a mutual fund is just a money-management tool that operates under clear rules. Yes, it involves a lot of marketing mumbo-jumbo and jargon, but the basic idea could be written on a postage stamp: In return for a fee, the people running the fund promise to invest your money wisely and give it back to you on demand. The fund industry is competitive and sophisticated, which means plenty of good choices are out there.
In this chapter, we show how funds make you money — especially if you leave your investment in place for several years. We also touch on the different types available, and quickly describe the main places you can go to buy funds. We discuss these topics in greater detail throughout the book, but after you read this first chapter, you’ll know the basics.
Getting the Scoop on Mutual Fund
A mutual fund is a pool of money that a company gets from investors like you and me and divides into equally priced units. Each unit is a tiny slice of the fund. When you put money into the fund or take it out again, you either buy or sell units.
For example, say a fund has total assets — that is, money held in trust for investors — of $10 million and investors have been sold a total of 1 million units. Then each unit is worth $10. If you put money into the fund, you’re simply sold units at that day’s value. If you take money out, the fund buys units back from you at the same price. (Handling purchase and sale transactions in units makes it far simpler to do the paperwork.) And the system has another huge advantage: As long as you know how many units you own, you can simply check their current price to find out how much your total investment is worth. So, if you hold 475 units of a fund whose current unit price is $15.20, then you know your holding has a value of 475 times $15.20, or $7,220.
Owning units of a mutual fund makes you — you guessed it — a unitholder. In fact, you and the other unitholders are the legal owners of the fund. But the fund is run by a company that’s legally known as the fund manager — the firm that handles the investing and also deals with the fund’s administration.
The terminology gets confusing here because the person (usually an employee of the fund manager) who chooses which stocks, bonds, or other investments the fund should buy is also usually called the fund manager. To make details clear, we refer to the company that sells and administers the fund as the management company or fund sponsor. We use the term fund manager for the person who picks the stocks and bonds. Their skill is one of the main benefits you get from a mutual fund. Obviously, the fund manager should be experienced and not too reckless — after all, you’re trusting them with your money.
Under professional management, the fund invests in stocks (shares in companies) and bonds (loans from government and businesses) and potentially other assets depending on the fund. That could include physical infrastructure, like toll roads, airports, and highways, or more recently bitcoin, a digital currency that many people use to buy and sell goods (often illicit goods) online increasing the pool of money for the investors and boosting the value of the individual units.
For example, if you bought units at $10 each and the fund manager managed to pick investments that doubled in value, your units would grow to $20. In return, the management company slices off fees and expenses. (In the world of mutual funds, just like almost everywhere else, you don’t get something for nothing.) Fees and expenses usually come to between 0.3 percent and 3 percent of the fund’s assets each year, depending on how a fund invests. Some specialized funds charge much more.
Mutual fund investing is not as confusing as it may seem. A fund company buys and sells the units to the public at what’s called a net asset value. You get this number by dividing the total net asset value of the fund or company by the number of shares outstanding. This number is known as the net asset value per share (NAVPS). This value increases or decreases proportionally as the value of the fund’s investments rises or falls. Say in January you pay $10 each for 100 units in a fund that invests in technology stocks, such as Microsoft, Apple, and NVIDIA. Now, say, by July, the value of the shares the fund holds has dropped by one-fifth. Then your units are worth just $8 each. So your original $1,000 investment is now worth only $800. But that August, several companies in the fund launch a bunch of game-changing artificial intelligence tools. That sends the value of their shares soaring and lifts the fund’s units to $15 each. The value of your investment has now grown to $1,500.
Open-and closed-end funds
Say you’ve made a profit on that technology fund you held. Where can you go from here? Well, that depends on you. You can hang in there and see if the fund can climb higher, or you can cash out. With most funds, you can simply buy or sell units at that day’s net asset value. That flexibility is one of the great beauties of mutual funds. Funds that let you come and go as you please in this way are known as open-end funds, as though they had a giant door that’s never locked. Think of a rowdy Viking banquet where guests are free to come and go at will because the wall at one end of the dining hall has been removed.
That means most mutual funds are marvelously flexible and convenient. The managers allow you to put money into the fund on any business day by buying units, and you take money out again at will by selling your units back to the fund. In other words, an investment in a mutual fund is a liquid asset. A liquid asset is either cash, or it’s an investment that can be sold and turned into good old cash at a moment’s notice. The idea is that cash and close-to-cash investments, just like water, are adaptable and useful in all sorts of situations. The ability to get your cash back at any time is called liquidity in investment jargon, and professionals prize it above all else.
The other type of fund is a closed-end fund. Investors in these funds often are sold their units when the fund is launched, but to get their money back they must find another investor to buy the units on the stock market such as a share, often at a loss. The fund usually won’t buy the units back or may buy only a portion.
You can make money in closed-end funds, but it’s very tricky. As craven brokerage analysts sometimes say when they hate a stock but can’t pluck up the courage to tell investors to sell it: “Avoid.”
THE SOMEWHAT SLEAZY DAWN OF THE MUTUAL FUND
The modern mutual fund evolved in the 1920s in the United States. In 1924, one Edward Leffler started the world’s first open-end fund, the Massachusetts Investors Trust. It’s still going. Mr. Leffler’s fund had to be purchased through a broker, who charged a sales commission, adding to an investor’s cost. Four years later, Boston investment manager Scudder Stevens & Clark started First Investment Counsel Corp., the first no-load fund (a fund you buy with no sales commission). The fund was called no-load because instead of purchasing it through a commission-charging broker, investors bought it directly from the company.
Nothing was wrong with those early open-end funds. They were run well and they survived the Great Crash of 1929 and the subsequent Depression, in part because the obligation to buy and sell their shares every day at an accurate value tended to keep managers honest and competent. But closed-end funds were the main game in the 1920s, because, as a Yale paper on the history of investment management regulation says, companies were more focused on selling funds than portfolio construction. (Closed-end funds don’t buy back your units on demand, meaning you’re locked into the fund until you find another investor to buy your units from you on the open market.) And a crooked game it was. By 1929, investors were paying ridiculous prices for closed-end shares. Brokers charged piratical sales commissions of 10 percent, annual expenses topped 12.5 percent, and funds kept their holdings secret. Needless to say, most collapsed in the Crash and ensuing Depression.
Following that debacle, mutual funds in Canada and the United States were far more tightly regulated, with laws forcing them to disclose their holdings at least twice a year and report costs and fees to investors. Plenty of badly run funds are still out there, not to mention plenty of greedy managers who don’t put their unitholders’ interests first, but at least now, clear rules exist that protect investors who keep their eyes open.
With most companies’ funds, you’re free to come and go as you please, but companies often impose a small levy on investors who sell their units within 90 days of buying them. That’s because constant trading raises expenses for the other unitholders and makes the fund manager’s job harder. The charge (which should go to the fund, and usually does) is generally one percent of the units sold, but it can be more. Check this out before you invest, especially if you’re thinking of moving your cash around shortly after you buy.
Returns — What’s in it for you?
The main reason why people buy mutual funds is to earn a return. A return is simply the profit you get in exchange for either investing in a business (by buying its shares) or for lending money to a government or company (by buying its bonds). It’s money you get as a reward for letting other people use your cash — and for putting your money at risk.
Mutual fund buyers earn the same sorts of profits, but they make them indirectly because they’re using a fund manager to pick their investments for them. The fund itself earns the profits, which are either paid out to the unitholders or retained within the fund itself, increasing the value of each of its units.
When you invest money, you nearly always hope to get:
Trading profits
or
capital gains
(the two mean nearly the same thing) when the value of your holdings goes up. Capital is just the money you tied up in an investment, and a capital gain is simply an increase in its value. For example, say you buy gold bars at $100 each and their price rises to $150. You earned a capital gain of $50, on paper at least.
Income
in the form of interest on a bond or loan, or dividends from a company.
Interest
is the regular fee you get in return for lending your money, and
dividends
are a portion of a company’s profits paid out to its shareowners. For example, say you deposit $1,000 at a bank at an annual interest rate of five percent; each year you’ll get interest of $50 (or five percent of the money you deposited). Dividends are usually paid out by companies on a per-share basis. Say, for example, you own 10,000 shares and the company’s directors decide to pay a dividend of 50 cents per share. You’ll get a cheque for $5,000.
You also hope to get the money you originally invest back at the end of the day, which doesn’t always happen. That’s part of the risk you assume with almost any investment. Companies can lose money, sending the value of their shares tumbling. Or inflation can rise (if you’re reading this in 2024, you know all about inflation), which nearly always makes the value of both shares and bonds drop rapidly. That’s because inflation eats away at the money’s value, which makes it less attractive to have the money tied up in such long-term investments where it’s vulnerable to steady erosion.
Capital gains versus dividend income
Here’s an example to illustrate the difference between earning capital gains and dividend income. Say you buy 100 shares of a company — a Costa Rican crocodile farm, for example — for $115 each and hold them for an entire year. Also, say you get $50 in dividend income during the year because the company has a policy of paying four quarterly dividends of 12.5 cents, or 50 cents per share, annually (that is, 50 cents times the 100 shares you own — $50 right into your pocket).
Now imagine the price of the stock rises in the open market by $12, from $115 to $127. The value of your 100 shares rises from $11,500 to $12,700, for a total capital gain of $1,200.
Your capital gain is only on paper unless you actually sell your holdings at that price.
Add up your gains and income, and that’s your total return — $50 in dividends plus a capital gain of $1,200, for a total of $1,250.
Take a look at another example: Say you bought units of a new mutual fund at $24.77 on the first day of April 2023, and it rose to $25.48 by the end of May. Economic volatility then caused the price to go up and down until October, after which the fund began a prolonged fall to $21.83 by the end of March 2024. That’s a loss of 2.9 cents on every unit an investor held.
Say the fund also pays out a quarterly distribution, a special or scheduled payment to unitholders, of 14.5 cents per unit at the end of June and September; 15.2 cents at the end of December; and 16.0 cents at the end of March, for a total distribution of 58.7 cents. Distributions are made when a fund has earned capital gains, interest, or dividends from its investments.
So what would be your return during the year? On a per-unit basis, you started with $24.77 and during the following 12 months suffered a capital loss of $2.94. However, thanks to the 58.7 cents of distributions, this loss was trimmed to about $2.44 a unit. That represented about 9.8 percent of the starting figure of $24.77, so the percentage return, the amount earned or lost by being invested, was a loss of 9.8 percent.
Calculating the return is actually a little more complicated than that because most investors would have simply reinvested the quarterly distribution in more units immediately after being paid out. In fact, returns for mutual funds always assume that all distributions are reinvested in more units. In that case, the fund’s official return for the year ending March 31, 2023, would be a loss of 9.5 percent.
Returns as a percentage
Returns on mutual funds, and nearly all other investments, are usually expressed as a percentage of the capital the investor originally put up. That way you can easily compare returns and work out whether or not you did well.
After all, if you tied up $10 million in an investment to earn only $1,000, you wouldn’t be using your cash very smartly. That’s why the return on any investment is nearly always stated in percentages by expressing the return as a proportion of the original investment.
In the example of the Costa Rican crocodile farm shares you purchased, the return was $50 in dividends plus $1,200 in capital appreciation, which is just a fancy term for an increase in the value of your capital, for a total of $1,250. At the beginning of the year, you put $11,500 into the shares by buying 100 of them at $115 each. To get your percentage return (the amount your money grew expressed as a percentage of your initial investment), divide your total return by the amount you initially invested and then multiply the answer by 100. The return of $1,250 represented 10.9 percent of $11,500, so your percentage return during the year was 10.9 percent.
It’s the return produced by an investment over several years, however, that people are usually interested in. Yes, it’s often useful to look at the return in each individual year — for example, a loss of 10 percent in Year 1, a gain of 15 percent in Year 2, and so on. But that’s a long-winded way of expressing details. It’s handy to be able to state the return in just one number that represents the average yearly return over a set period. It makes it much easier, for instance, to compare the performance of two different funds. The math can start getting complex here, but don’t worry — we stick to the basic method used by the fund industry.
Fund returns are expressed, in percentages, as an average annual compound return. That sounds like a mouthful, but the concept is simple. Say you invested $1,000 in a fund for three years. In the first year, the value of your investment dropped by 10 percent, or one-tenth, leaving you with $900. In Year 2, the fund earned you a return of 20 percent, leaving you with $1,080. And in Year 3, the fund produced a return of 10 percent, leaving you with $1,188. So, over the three years, you earned a total of $188, or 18.8 percent of your initial $1,000 investment.
When mutual fund companies convert that return to an “average annual” number, they invariably express the number as a “compound” figure. That simply means the return in Year 2 is added (or compounded) onto the return in Year 1, and the return in Year 3 is then compounded onto the new higher total, and so on. A return of 18.8 percent over three years works out to an average annual compound return of about 5.9 percent.
As the example demonstrates, the actual value of the investment fluctuated over the three years, but it actually grew steadily at 5.9 percent. After one year, the $1,000 would be worth $1,059. After two years, it would be worth $1,121.48. And after three years, it would be worth $1,187.65. The total differs from $1,188 by a few cents because we rounded off the average annual return to one decimal place, instead of fiddling around with hundredths of a percentage point.
There are a few terms to remember when looking at an average annual compound return. Review these terms — average, annual and compound — and their explanations few times.
Average:
That innocuous-looking average usually levels out some mighty rough periods. Mutual funds can easily lose money for years on end — it happened, for example, when the world economy was hurt by inflation and recession in the 1970s. The COVID-19 pandemic also sent mutual funds and equities into a spiral in 2020, but the markets have recovered from pandemic lows.
Annual: Obviously, this means per year. And mutual funds should be thought of as long-term holdings to be owned for several years. The general rule in the industry is that you shouldn’t buy an equity fund — one that invests in shares — unless you plan to own it for five years. That’s because stocks can drop sharply, often for a year or more, and you’d be silly to risk money you may need in the short term (to buy a house, say) in an investment that may be down from its purchase value when you go to cash it in. With money you need in the near future, you’re better off to stick to a super-stable, short-term bond or money market fund that will lose little or no money (more about those later).
Mutual fund companies sometimes use the old “long-term investing” mantra as an excuse. If their funds are down, they claim it’s a long-term game and that investors should give their miraculous strategy time to work. But if the funds are up, the managers run ads screaming about the short-term returns.
Compound:
This little word, which means “added” or “combined” in this context, is the plutonium trigger at the heart of investing. It’s the device that makes the whole concept go. It simply means that to really build your nest egg, you have to leave your profits or interest in place and working for you so you can start earning income on income. After a while, of course, you start earning income on the income you earned, until it becomes a very nicely furnished hall of mirrors.
Here’s another example of compounding: Mr. Simple and Ms. Compound each have $1,000 to invest, and the bank’s offering 10 percent a year. Now, say Mr. Simple puts his money into the bank, but each year he takes the interest earned and hides it under his mattress. After ten years, he’ll have his original $1,000 plus the ten annual interest payments of $100 each under his futon, for a total of $2,000. But canny Ms. Compound leaves her money in the account, so each year the interest is added to the pile and the next year’s interest is calculated on the higher amount. In other words, at the end of the first year, the bank adds her $100 in interest to her $1,000 initial deposit and then calculates the 10-percent interest for the following year on the higher base of $1,100, which earns her $110. Depending on how the interest is calculated and timed, she’ll end the ten years with about $2,594, or $594 more than Mr. Simple. That extra $594 is interest earned on interest.
How funds can make you rich
The real beauty of mutual funds is the way they can grow your money over many years. “Letting your money ride” in a casino — by just leaving it on the odd numbers in roulette, for example — is a dumb strategy. The house will eventually win it from you because the odds are stacked in the casino operator’s favour. But letting your money ride in a mutual fund over a decade or more can make you seriously rich.
An investment in the RBC Select Balanced Portfolio, the largest fund by assets in Canada, from its launch in 1986 through the end of June 2023, produced an annual average compound return of about 6.1 percent. If your granny had been prescient enough to put $10,000 into the fund when it was launched, it would have been worth $87,165 in 2023.
The main reason why Canadians had more than $1.8 trillion in mutual funds at the end of 2022 is that funds let you make money in the stock and bond markets almost effortlessly. By the way, that $1.8 trillion figure doesn’t even include billions more sitting in segregated funds, which are mutual fund-like products sold by life insurance companies. They’re called segregated because they’re kept separate from the life insurer’s regular assets. (You can read more on segregated funds in Chapter 19.) It also doesn’t include billions in exchange-traded funds (ETFs), a mutual-fund-like vehicle that trades on a stock exchange, and is a rapidly growing part of the Canadian market and could one day become even more popular that mutual funds. (You can read more about ETFs in Chapter 15.)
Of course, no law says you have to buy mutual funds in order to invest. You may make more money investing on your own behalf, and lots of people from all walks of life do. But it’s tricky and dangerous. So millions of Canadians too busy or scared to learn the ropes themselves have found that funds are a wonderfully handy and reasonably cheap alternative.
Buying funds is like going out to a restaurant compared with buying food, cooking a meal, and cleaning up afterward. Yes, eating out is expensive, but it sure is nice not to have to face those cold pots in the sink covered in slowly congealing mustard sauce.
What mutual funds buy
Mutual funds and other investors put their money into two main long-term investments:
Stocks and shares:
Tiny slices of companies that trade in a big, sometimes chaotic but reasonably well-run electronic vortex called, yes, the stock market.
Bonds:
Loans made to governments or companies, which are packaged up so that investors can trade them to one another.
Folks’ memories run deep, and after ugly stock market meltdowns in the 1920s and 1970s, mutual funds and stocks generally had unhealthy reputations for many years. For generations, Canadians and people worldwide preferred to buy sure things, usually bonds or fixed-term deposits from banks, the beloved guaranteed investment certificate (GIC). But as inflation and interest rates started to come down in the 1990s, it became harder and harder to find a GIC that paid a decent rate of interest — research shows most people are truly happy when they get eight percent.
As Table 1-1 shows, the Canadian mutual fund industry has seen some impressive growth — interest exploded after rates on five-year GICs dropped well below that magic eight percent back in the 1990s. At that point, Canadians decided they were willing to take a risk on equity funds. (Inflation reached record levels in 2022 and 2023 — the impact rising prices might have on mutual funds remains to be seen but at the time I’m writing this, GICs are more attractive than they’ve been in decades.)
Table 1-1 shows the growth of assets under management in the Canadian mutual fund industry from 2010 to the end of December 2022. Yes, growth did decline in 2022, partly because it was a down year for markets, but also because ETFs have started to eat into mutual funds’ popularity, which we explain in Chapter 15.
TABLE 1-1 Growth of the Mutual Fund Industry in Canada
Total Assets
Year
$Billions
2012
803
2013
999
2014
1,141
2015
1,231
2016
1,339
2017
1,477
2018
1,423
2019
1,630
2020
1,784
2021
2,083
2022
1,809
Industry statistics provided by the Investment Funds Institute of Canada.
Finding Your Type (of Funds)
Mutual funds fall into four main categories. In Chapters 10 to 20 we go into all kinds of funds, but this is a quick breakdown of the bare facts. The four main types of mutual funds are:
Equity funds:
By far the most popular type of fund on the market, equity funds hold stocks and shares. Stocks are often called “equity” because every share is supposed to entitle its owner to an equal portion of the company. We look at the range of equity funds available to you in
Chapters 10
,
11
, and
12
.
Balanced funds:
The next biggest category is balanced funds. They generally hold a mixture of just about everything — from Canadian and foreign stocks to bonds from all around the world, as well as very short-term bonds that are almost as safe as cash.
Chapter 13
gives you the scoop on balanced funds.
Bond funds:
These beauties, also referred to as “fixed-income” funds, essentially lend money to governments and big companies, collecting regular interest each year and (nearly always) getting the cash back in the end. We offer the thrilling details about these funds in
Chapter 14
.
Money market funds:
They hold the least volatile and most stable of all investments — very short-term bonds issued by governments and large companies that usually provide the lowest returns. These funds are basically savings vehicles for money you can’t afford to take any risks with. They can also act as the safe little cushion of cash found in nearly all well-run portfolios.
Chapter 17
fills you in about these funds.
With so many options, there’s bound to be a fund that works for you and your financial goals.
Figuring out Where to Buy
So how do you actually buy a fund? In essence, you hand over your money and a few days later, you get a transaction slip or confirmation slip stating the number of units you bought and what price you paid. Chapter 3 goes into detail about some of the legal and bureaucratic form-filling involved in buying a fund (don’t worry, it’s not complicated).
You can buy a mutual fund from thousands of people and places across Canada, in one of four basic ways:
Buying from professional advisors: The most common method of making a fund purchase in Canada is to go to a stockbroker, financial planner, or other type of advisor who offers watery coffee, wisdom, and suggestions on what you should buy. These people will also open an account for you in which to hold your mutual funds. They are often paid a commission on the funds they sell. Find out more in Chapters 2 and 8.
Examples of fund companies that sell through advisors, planners, and stockbrokers are Mackenzie Financial Corp., Fidelity Investments Canada Ltd., CI Fund Management Inc., AGF Management Ltd., and Franklin Templeton, all based in Toronto. Investors Group Inc. of Winnipeg, Canada’s biggest fund company, also sells through salespeople, but the sales force is affiliated with the company.
Online purchases:
The simplest way to buy funds these days is online at a banks’ website. Banks don’t charge sales commissions to investors who buy their funds. The disadvantage to this approach is limited selection, because most bank branches are set up to sell only their company’s funds. But the beauty of this approach is that you can have all your money — including your savings and chequing accounts and even your mortgage or car loan — in one place. Learn more in
Chapter 7
.
Buying direct from fund companies:
For those who like to do more research on their own, excellent “no-load” companies sell their funds directly to investors. They’re called no-load funds because they’re sold with no sales commissions. No-load funds can avoid levying sales charges because they don’t market their wares through salespeople. Because these funds don’t have to make payments to the advisors who sell them, they often come with lower expenses. We go into more in
Chapter 9
.
Buying from discount brokers:
Finally, for the real do-it-yourselfers who like to make just about every decision independently, you can find discount brokers, which operate online. Mostly but not always owned by the big banks, they sell funds – sometimes from other companies, sometimes from their own – usually free of commissions and sales pitches. We talk more about discount brokers in
Chapter 6
.
Chapter 2
Buying and Selling Basics
IN THIS CHAPTER
Exploring reasons to choose mutual funds
Looking at potential drawbacks of funds
Considering load versus no-load funds
Mutual funds were one of the 20th century’s great wealth-creating innovations. Funds transformed stock and bond markets by giving people of modest means easy access to investments previously limited to the rich. The fund-investing concept is likely to remain popular for years, letting ordinary and not-so-ordinary people build their money in markets that would otherwise intimidate them. That’s because the idea of packaging expert money management in a consumer product, which is then bought and sold in the form of units, is so brilliantly simple.
In this chapter, we take another look at funds, assessing their great potential as well as their nasty faults. We wrap up with a chat about the relative merits of no-load and load funds, which refers to two different ways advisors and fund companies get paid when they sell you a mutual fund.
Reasons to Buy Funds
In Chapter 1, we discuss how and why mutual funds work and why they make sense in general. Here we give you some specific, significant reasons to make them a big part of your financial plan.
Offering safety in numbers: Public scrutiny and accountability
Perhaps the best aspect of mutual funds is that their performance is public knowledge. When you own a fund, you’re in the same boat as thousands of other unitholders, meaning the fund company is pressured to keep up the performance. If the fund lags its rivals for too long, unitholders will start redeeming or cashing in their units, which is the sort of worry that makes a manager stare at the ceiling at 4 a.m., sweat rolling down their grey face.
Fund companies are obliged to let the sun shine into their operations — and sunlight is the best disinfectant — by sending unitholders clear annual financial statements of the fund’s operations. These statements are tables of figures showing what the fund owns at the end of the year, what expenses and fees it paid to the management company, and how well it performed. Statements are audited (that is, checked) by big accounting firms. The management company is obligated to send you semi-annual statements to keep you informed about performance For more on the financial statements for funds, see Chapter 3.
You can find a lot of this information online on the mutual fund company’s website. One particularly useful document is the Fund Facts, which is either online or in a downloadable PDF that lists some of the fund’s holdings, fees, geographic makeup, and more.
Most companies only share their Best 10 Ideas online — if they give away too much of their recipe, others could cook up the same recipe. However, you can get a full list from the annual statement, but it’s possible your fund manager has sold out of some positions before those documents get to your door. In any case, you want to examine a fund’s holdings because if you bought what you thought was a conservative Canadian stock fund, for example, then you want to make sure it actually is conservative. In that case, you may see lots of bank stocks and other companies you’ve at least heard of.
The information in the statements can be hard to understand and not particularly useful, but always check one detail: Look at the fund’s top 10 holdings.
Your account statements are personal mailings that show how many units you own, how many you’ve bought and sold, and how much your holdings are worth. Companies usually send you personal account statements at least twice a year. Some fund sellers, such as banks, send quarterly statements, and discount brokers often mail them monthly. Of course, you can also view your statements online and see how much money is in your account every day. See Chapter 3 for more on account statements.
Don’t confuse the financial statements
