Top of main content

Mutual funds for beginners

Discover whether investing in mutual funds is right for you.

Mutual funds bring together money from multiple investors and invest it on their behalf. So, when you invest in a mutual fund, you’re buying a share in the fund and its assets – the stocks, bonds or other equities it’s invested in.

Key features of mutual funds

Mutual funds give you access to a variety of different assets at once so you can easily diversify your investments. They’re managed by professional fund managers, which can save you from having to research and choose individual stocks. As with any investment, there are advantages and disadvantages.

Advantages

  • All mutual funds are managed by a professional fund manager with expert knowledge in capital markets

  • You don’t have to research and actively manage the assets in a mutual fund

  • Mutual funds usually invest in a wide variety of different assets

  • Risk is spread out among the assets within the fund

  • Mutual funds can easily be redeemed for cash

Disadvantages

  • Professional management is no guarantee of positive returns, so you can still lose money

  • Mutual funds usually have a management fee

  • Regardless of whether a mutual fund is profitable, investors must continue to pay associated fees

  • When a mutual fund is too diverse, the potential for profit is lowered

  • Profits from a few holdings in a mutual fund may be offset by other assets within the fund

  • Unlike stocks, investors must hold on to mutual funds for a set timeframe

  • Mutual funds are priced and traded only once a day, at the market close

There are several ways you can earn returns through mutual funds:

  • Dividends on stocks and interest on bonds may pay an income, which you can choose to either take or reinvest

  • Capital gains if the fund’s assets have risen in price

  • If the value of the fund increases, you’ll profit when you choose to sell

Types of mutual funds

Mutual funds vary depending on what they’re invested in and their investment goals. Funds either invest in a range of different assets, such as bonds, equities and other securities, or a single asset type, such as bonds or stocks.

There are two main types of mutual funds – mutual trust funds and corporations.

Here are some of the key differences:

Mutual trust fund Corporation fund
Structured as a trust Structured as a typical corporation
Usually have a single fund Can have more than one tax entity
Can’t be switched or rebalanced Can compound returns with tax-free switching and rebalancing between funds
Profit or loss is accrued by the fund Can distribute profit and losses across funds
Usually a lower cost option May be more expensive

Here are some of the key differences:

Mutual trust fund Structured as a trust Structured as a trust
Corporation fund Structured as a typical corporation Structured as a typical corporation
Mutual trust fund Usually have a single fund Usually have a single fund
Corporation fund Can have more than one tax entity Can have more than one tax entity
Mutual trust fund Can’t be switched or rebalanced Can’t be switched or rebalanced
Corporation fund Can compound returns with tax-free switching and rebalancing between funds Can compound returns with tax-free switching and rebalancing between funds
Mutual trust fund Profit or loss is accrued by the fund Profit or loss is accrued by the fund
Corporation fund Can distribute profit and losses across funds Can distribute profit and losses across funds
Mutual trust fund Usually a lower cost option Usually a lower cost option
Corporation fund May be more expensive May be more expensive

There are also four main categories of funds, with different features depending on your investment goals:

Money market funds are issued by corporations and governments, and so offer a relatively high quality, lower-risk investment.

Bond funds, which, with a wide variety of bonds, can vary in terms of risk and reward.

Stock funds, which invest in equities on the stock market. These can track a whole market index, a particular sector, or a theme, such as dividend-paying stocks.

Target date funds, typically used by pension providers, hold a mix of bonds, stocks and other assets offering a well-diversified investment strategy for people planning their retirement.

Open-ended vs closed-ended funds?

You may also come across the terms ‘open-ended’ and close-ended’ to describe funds. Broadly, an open-ended fund has no limit on how much investment it will accept and is traded directly via the fund manager, while a closed-ended funds have a fixed number of shares and are traded on regulated exchanges.

Closed-ended funds are viewed as riskier, and don’t offer easy access to your money, which is why open-ended funds are more widely available in Canada.

Are mutual funds right for you?

Like all investments, your circumstances and risk tolerance should help inform your decisions about whether to invest, and what type of mutual fund may suit you.

It’s taking fees and charges into account when assessing the potential rate of returns. This means working out your expense ratio to determine whether it’s worth paying extra for an actively managed fund, or whether a lower-cost tracker might achieve your investment goal.

Seemingly small costs can make a big difference over a longer time frame.

It’s also worth thinking about the type of fund you wish to invest in, as some may come with higher risk – and potential reward – than others.

As with all types of investment, you may get back less than you put in. Investing over the medium to long term, around 5-10 years, may provide your investment time to recover from any short term falls.

How to invest in mutual funds

Choosing the fund that’s right for you can be challenging.

It's important to understand the different risks and potential rewards of each mutual fund. While Canadian issued mutual funds may trade in US dollars, HSBC InvestDirect offers mutual funds issued in CAD dollars only.

Before you invest

Before making any kind of investment, it’s worth considering your current financial position, and setting aside an emergency fund of 3-6 months’ salary to manage any unforeseen expenses without having to withdraw your investments early.

It’s always worth seeking independent financial advice before investing.

Pre-investment checklist:

  • Assess your current final position

  • Work out your investment goals, timeframe, risk appetite

  • Consider your options, such as asset classes and investment types

  • Get independent financial advice

Learn about HSBC InvestDirect

HSBC InvestDirect is a division of HSBC Securities (Canada) Inc., a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.  HSBC Securities (Canada) Inc. is a Member of the Canadian Investor Protection Fund.  HSBC InvestDirect does not provide investment advice or recommendations regarding any investment decisions or securities transactions.