Mutual funds for beginners
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.
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.
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
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
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.
|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|
|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.
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.
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 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.
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
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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.