Mutual funds – Kateryna Litvinjuk

Kateryna Litvinjuk,
Wealth Strategy Group

You probably already know that investing, in mutual funds in particular, has become very popular among many people in the past 20 years. Mutual funds are now part of our everyday lives.

For many people, investing indeed means putting money in mutual funds which could bring higher returns than holding money on savings accounts. However, many people have a scant idea about mutual funds.

What is a mutual fund?

Mutual funds are professionally managed collective investing systems, which invest into a number of assets such as stocks, bonds and other securities. There are two types of mutual funds: open and closed ones. Open mutual funds issue new shares as more people bring their money in, and are the most popular.

Mutual funds can invest into government bonds, large-cap stocks, foreign stocks, etc. Some mutual funds invest into stocks and bonds simultaneously and into other mutual funds.

Mutual funds benefits.

When you buy mutual fund shares, you make a joint investment together with many other investors. This allows to invest in different assets at relatively low prices. Another mutual fund advantage is that they are managed by professional managers. Mutual funds are easily and widely accessible through banks, financial companies, brokerages and credit unions. Mutual fund shares are liquid – you can sell them at any time.

Importance of diversification.

Diversification is needed to lower the investment risk of the portfolio. A portfolio which holds different assets on average posts better returns and has lower risks than for any single asset.

Different assets react differently to economic factors, exchange rate fluctuations and global events. Diversification smoothes the effects of this kind of events and lowers risks because positive factors from some assets neutralize negative effects from the others. Investing in foreign securities also brings diversification: for example, an economic decline in the USA may not have an effect on the Japanese economy, and those mutual funds which hold Japanese stocks will have higher returns in this situation.

Benchmarks

A benchmark is a security index whose performance is used to compare the performance of mutual funds to. For instance, for mutual funds, which mainly invest in Canadian stocks, S&P/TSX Composite Index is used as a benchmark. Using benchmarks, investors are able to compare how their mutual funds did as opposed to the wider market.

How to make money?

If your mutual fund shares are rising in value, it is called capital gains, and otherwise, you can have a capital loss. Depending on the fund, you could get interests, dividends, capital gains and other types of income. These gains may be deposited on your bank account or reinvested, at your request. Values of most mutual funds fluctuate, sometimes they fluctuate often and by large measure. You should also remember that mutual funds charge commissions which affect your returns.

How to choose a mutual fund?

You can always find the mutual fund’s past performance, although it does not guarantee its future performance[KL1] [KL2] . To make more informed conclusions, you could analyse the fund’s performance in different market conditions and see how it performed against its peers with the same investment objective and against the benchmark.

Mutual fund taxes.

Generally, you need to pay taxes on your profits. Interests, dividends and capital gains are treated differently in terms of taxation purposes. If you invest through registered accounts, such as RESP, RRSP and RRIF, you will not pay taxes as long as your assets are held in these accounts. If you withdraw your funds from these accounts, you will have to pay the tax.

Risks

Most mutual funds do not guarantee that you will receive profits and you run a chance of losing money. Different funds have different levels of risk. For instance, stocks are generally more risky than bonds. It is very important to understand risks correctly and know the level of your risk acceptance. Before you invest in mutual funds, you need to realize that they are different from some other investment vehicles and have a long-term nature.

If you are interested in investing into mutual funds, Ukrainian Credit Union investment specialists will always be glad to give you a professional advice.

Kateryna Litvinjuk,

Wealth Strategy Group

Ukrainian Credit Union Limited

(416)763-5575 ext.203,

klitvinjuk@ukrainiancu.com

Mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual funds and other securities are not insured nor guaranteed, their values change frequently, and past performance may not be repeated. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. The views expressed are those of the author and not necessarily those of Credential Securities Inc.®.  Credential is a registered mark owned by Credential Financial Inc. and is used under licence. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.