Mutual Funds 

A mutual fund or open-end investment fund is a company or trust engaged in managing investments for others. Mutual funds are basically a professionally managed "pool" of money resulting from the contributions of thousands of individual investors.
For investors, mutual funds offer many advantages including:

Professional Management: Investment decisions are made by a professional investment manager.
Diversification: Mutual funds reduce portfolio risk through diversification. A large fund could have 100 or more different securities in as many as 20 industries. Most investors can't achieve this level of diversification on their own. However, not all funds are well diversified (e.g. sector funds).
Variety of Funds: There are a wide range of funds available to meet different investment objectives (e.g. money market funds, bond funds, Canadian equity funds, International equity funds, etc.)
Variety of Purchase Plans: Investors can purchase mutual funds with a lump sum purchase or regular smaller purchases.
Liquidity: Mutual fund investors have a continuous right to redeem their shares for cash at the net asset value. There is no need to worry about finding a buyer or about the price at which the shares will sell.
Record keeping: Mutual fund companies account for and report information on dividends, interest, capital gains, and other distributions. Summary reports on account activities are also produced. This service helps the investor make more informed investment decisions and simplifies the preparation of tax returns.

Disadvantages of mutual funds include:

Not Suitable for Short-Term Investments: Most funds are subject to a front-end or back-end fee making short-term purchases unattractive. Many funds are also quite volatile over short periods. This volatility is generally reduced as the investment horizon is increased. Money market funds are an exception and are suitable as a short-term investment.
Taxable Distributions: Mutual funds are obligated to distribute to shareholders a portion of the interest and capital gains realized annually on their investments. Shareholders must therefore pay the taxes on these distributions (non-registered investments only). However, many funds are designed to minimize taxable distributions.
Non-Infallibility of Management: Even investments managed by professionals can perform poorly. A large proportion of mutual funds underperform comparable averages.
There is a diverse range of mutual funds available to meet the range of investment objectives. Mutual funds can differ from one another in many areas including:

Investment Objective (e.g. growth vs. preservation of principal)
Investment Style (e.g. value vs. growth)
Investment Strategy (e.g. momentum vs. buy and hold)
The following are some of the types of mutual funds available:

Money Market Funds:
The main objectives of these funds are income and liquidity. These funds invest in short-term money market instruments such as treasury bills, commercial paper and short-term government bonds. As a result, there is almost no opportunity for capital gains.
Mortgage Funds:
The investment objectives of these funds are income and safety. Investments are generally concentrated on residential mortgages. Funds of this type are typically very conservative and returns are mainly in the form of interest income.
Bonds Funds:
Bond funds generally invest in high quality government and corporate debt securities. The primary investment objectives of bond funds are income and safety. However, these funds are subject to capital gains and losses.
Dividend Funds:
The investment objectives of these funds are tax advantaged income with the possibility of capital growth. Investments are concentrated on preferred shares and high quality common shares with a history of regularly paying dividends.
Balanced Funds:
A combination of safety, income and capital appreciation is the objective of these funds. Balanced funds invest in fixed income securities (i.e. bonds and cash) and a diversified group of common stocks.
Asset Allocation Funds:
These funds are similar to balanced funds, but differ in that there typically is not a specific minimum percentage of investments that must be held in any class of investments. The objective is a combination of safety, income and capital appreciation.
Equity Funds:
The primary investment objective of these funds is capital gains. Although fixed income securities are purchased at times, the majority of assets are invested in common shares.
International or Global Funds:
These funds invest in markets that offer the best prospects, regardless of geographic location. Investments may be primarily in bonds (e.g. global bond funds), common shares (e.g. international equity funds) or a combination of the two (e.g. global balanced funds). The investment objectives are dependent on the type of security in which the fund invests.
Index Funds:
These funds attempt to match the performance of a specific market index. The objective of the fund is dependent on which index it is attempting to match. As the investment decisions are generally limited to ensuring the portfolio reflects the associated index, the management fees for index funds are usually lower than similar "non-index" funds.
Sector/Specialty Funds:
The investment objective of these funds is capital gains. In contrast to most other equity funds, sector/specialty funds are not as broadly diversified with investment holdings concentrated in a particular industry, geographic location or segment of the capital market. As a result, these funds tend to be more volatile.
Labour Sponsored Funds:
These funds have fewer investment controls than other mutual funds and investments are somewhat speculative in nature. However, purchasers of these funds are entitled to a provincial and federal tax credit. The primary investment objective of labour sponsored funds is long-term capital appreciation.
The manager's investment style is also an important consideration when selecting a mutual fund. Most fund manager's adhere to one or a combination of the following styles:

Value:
Managers who follow this approach to investing attempt to identify companies which are fundamentally strong, but out of favour and therefore trading at low prices. Stocks in these portfolios typically trade at low price-to-earnings ratios or book value.
Growth:
Managers who follow a growth style look for companies with a record of rapid growth in sales and earnings or which are expected to have above average growth in the future. Growth stocks typically have higher than average price-to-earnings ratios and trade at a price above their book value.
Sector Rotation:
Investment selection is concentrated on specific industries which are expected to provide the greatest growth. Changes to sector weightings are made in response to changes in their anticipated performance. Sector managers use a top-down approach to implement this style, however, portfolios can exhibit growth or value characteristics.
Top-Down:
A top-down style focuses on an analysis of the economy and the market outlook in order to determine the markets and industries that are expected to outperform.
Bottom-Up:
Managers that follow this approach to investing begin by selecting individual companies with strong potential. Little to no emphasis is placed on the larger picture (i.e. the economy and markets).
Interest-Rate Anticipation:
This technique is based on forecasting and analyzing the direction of change in interest rates and the degree of the changes across different bond maturities. The anticipated change in interest rates is the basis for changing the duration of the bond portfolio (duration is a measure of risk or the price volatility of a bond).
There are certain risks involved in mutual fund investing, several of which are described below:

Individual Company/Industry Risk:
This type of risk, also referred to as portfolio risk, is mainly eliminated within a well diversified mutual fund. However, this risk does remain with some sector/specialty funds as the scope of investments is more limited.
Category Risk:
This is a level of risk associated with the category or type of security within a fund. For example, common shares have a higher level of risk than bonds which have a higher level of risk than cash.
Market Risk:
This is the risk associated with fluctuations in the market as a whole, typically measured as beta for equity funds and average maturity for bond funds.
In summary, mutual funds are an important investment product which provides individual investors with several advantages over many other types of investments (e.g. professional management and diversification). There are many products available with different investment objectives, management styles and levels of risk. Investors should have at least a basic understanding of these factors before purchasing a mutual fund.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investing. Please read the fund's simplified prospectus before investing. It is important to recognize that mutual funds may fluctuate in value and that performance is not guaranteed. Past performance may not be indicative of performance in the future.

Mutual Funds provided by:Fundex 

All information contained in this site relating to mutual funds is intended for Ontario residents only. The content may not conform to the securities legislation in other jurisdictions and should not be misrepresented as soliciting business from persons residing outside of the province of Ontario.