National Bank Securities - Mutual Funds

1 - General

1.1 What's a mutual fund?

A mutual fund is simply a pool of money from a number of investors with similar goals. When you invest in a mutual fund, you buy part of the fund, called a unit. The more money you invest, the more units you receive. Decisions concerning the fund are made by managers. Mutual funds invest in a wide range of securities, notably common and preferred shares, debt securities such as bonds and debentures, as well as money market instruments such as Treasury bills.

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1.2 What's an RRSP (Registered Retirement Savings Plan)?

An RRSP is an investment vehicle that allows an individual to defer some income tax on invested money. No tax is payable on the invested money or on the capital gains until time of withdrawal—usually at retirement. An RRSP is an excellent way to save for your retirement.

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1.3 What's a GIC (guaranteed investment certificate)?

A GIC is a security issued by a financial institution certifying that a certain amount of money has been invested at a certain interest rate for a given period or time and will yield a specific amount (the final return). There are other types of GICs, such as index-linked GICs, for which the final return is not known at time of issue. GICs are protected by the CDIC to a maximum of $100,000 per institution.

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1.4 What's a security?

A security is an investment instrument offered by a corporation, government or other organization. The most popular securities include common and preferred shares, debt securities and mutual fund units.

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2 - Funds

2.1 Why should I invest in mutual funds?

There are many advantages to investing in a mutual fund:

Professional management: With mutual funds, you benefit from the expertise of portfolio managers who draw on the latest research reports and data to make sound investment decisions.

Diversification: Diversification means being invested in a number of different securities. Most investors don't have enough money to build a well-diversified portfolio on their own. But with mutual funds, you can invest in a variety of industries and securities at the same time. If the return on one security is disappointing, it will be offset by a higher return on another.

Variety: Investors can choose from various types of funds, such as income funds, equity funds, balanced funds or specialized funds. There is a mutual fund for every investment goal. Furthermore, mutual funds enable you to invest in markets that are not easily accessible to individual investors, such as foreign markets.

Flexibility: You can transfer your investments free of charge to other funds belonging to the same family, such as the National Bank mutual funds family. You can also sign up for a systematic investment plan or a systematic withdrawal plan.

Quick access to your money: It’s easy to sell your mutual fund units at any time.

Tracking: As a mutual fund investor, you receive statements, financial reports and tax slips on a regular basis, making it easier to monitor your investments.

 

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2.2 How do I pick the funds that are right for me?

There are mutual funds on the market to meet all investment goals. In general, the more volatile the investment, the higher the potential return. The Personalized Investment Plan is the perfect tool to help you with this kind of decision. After answering six questions, developed and tested by our research department, you will find which investor profile matches your investment goals and your degree of risk tolerance, as well as the most suitable asset mixes to meet your needs.

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2.3 What’s the best time to start investing?

Anytime's the right time to start investing. The golden rule is not to speculate, but to plan according to your goals. Patience is an investor's best friend, and the statistics prove it: a mutual fund investment can earn you a lot over the long term, in spite of market corrections.

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2.4 How do I find out what my investor profile is?

To find out what kind of investor you are, you must analyze the following points. This will help you determine an efficient investment strategy.

Your investment goals. Are you investing for retirement, to buy a home, to finance your children's education or for something else?

Your investment horizon. When will you need your capital? In 5, 10 or 25 years? If you are investing for your retirement in, say, 30 years, you can build up a diversified portfolio using a more aggressive strategy. Since you are investing for the longer term, you will have enough time to recoup any losses you might suffer as a result of unfavourable market fluctuations.

Your risk tolerance. Your personal ability to tolerate risk is an essential element in determining your investor profile. If you lie awake nights worrying about your investments, then you're probably taking too many risks. If your goal is to receive interest and keep your money safe, and a higher long-term return really isn't that important to you, then a less risky investment with a lower potential return could suit you very well. However, if you are saving up for your retirement and you're invested for the long term, you may want to assume a higher level of risk and take advantage of higher growth potential.

Your financial situation. Could you take a market correction in stride? Your overall financial situation will help you determine the level of risk you can tolerate in your investment portfolio. Investors who have lots of other assets will find it easier to withstand fluctuations in their portfolio. Investors who are in a less stable financial situation may be less risk tolerant.

Your investment knowledge and experience. There are many inexperienced investors who overestimate their ability to tolerate risk. Investors who are just getting started often think they have a high degree of risk tolerance until they start having sleepless nights at the first sign of a market fluctuation. It's better to start cautiously in order to test yourself. There's nothing to stop you from reviewing your portfolio every six months to a year to adjust your risk-tolerance level.

To get your investor profile, simply complete the Personalized Investment Plan.

 

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2.5 Should I review my Personalized Investment Plan on a regular basis?

You should review your Personalized investment Plan at least once a year in case there have been any changes in your situation, your investor profile or your portfolio mix. For instance:

  • the fund family you are investing in may offer new funds;
  • because financial markets don't all evolve in the same direction at the same time, you need to see whether you should readjust your portfolio to ensure that it still matches your profile;
  • your personal situation may change. A new job, an inheritance or the purchase of a home are all elements that must be taken into consideration.
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2.6 How often should I invest?

It can be hard to be disciplined about saving. A good solution is to enrol in National Bank's systematic investment plan. You can contribute weekly, monthly or quarterly. This helps you develop the financial discipline needed to achieve your goals.

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2.7 How can I find out what my risk tolerance is?

There are several factors to consider. Your financial situation, your age and your goals are very important. If you have a mortgage to pay off and a family to raise, then your risk tolerance may be lower than if you had no dependents and no large payments to make.

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2.8 How do I minimize my risks?

Diversify. Diversify. Diversify! Asset classes don't all move in the same direction at the same time. Since it's impossible to predict which asset class will be the best performer from one year to the next, the best investment strategy is to invest in several of them, in a proportion that corresponds to the level of risk you are willing to accept.

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2.9 What's the relationship between risk and return?

Risk and return are closely related. If you want a higher return, you've got to be prepared to assume more risk meaning more ups and downs. Each type of fund has its own level of risk and return.

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2.10 Are my mutual fund investments guaranteed?

No, they aren’t. Unlike bank accounts and GICs, mutual fund units are not covered by the Canada Deposit Insurance Corporation (CDIC) or any other government deposit insurance authority.

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3 - Tax Issues

3.1 What types of income are distributed to unitholders of National Bank mutual funds?

The capital invested in National Bank mutual funds is invested in a variety of securities products such as stocks, bonds or money market instruments according to specific investment policies and is professionally managed. Investments generate income in the form of dividends, interest and capital gains from the sale of investments.

Investment income and capital gains are taxed differently: interest income is taxed as salary, whereas dividend income from Canadian corporations is eligible for a dividend tax credit that reduces the amount of tax payable. Only 50% of capital gains distributions are taxable.

The following table shows how each type of income distributed by National Bank mutual funds is taxed.

 

Highest marginal tax rate 
(in 2003)

Type of investment

Tax category

Quebec

Ontario

New Brunswick

P.E.I

Canadian money market securities
(T-bills for example)
Canadian bonds
Canadian mortgages

Other income (interest)

48.2%

46.4%

46.8%

47.4%

Shares of Canadian corporations

Dividends

32.8%

31.3%

37.3%

32.0%

Foreign stocks and bonds

Foreign non-business income
(foreign interest or dividends)

48.2%

46.4%

46.8%

47.4%

Futures

Other income

48.2%

46.4%

46.8%

47.4%

When there is a disposition of the fund

Capital gains

24.1%

23.2%

23.4%

23.7%

National Bank mutual funds issue the T3 and Relevé 16 (in Québec) supplementary tax slips which provide investors the information they need to fill in their income tax returns.

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3.2 Why do National Bank mutual funds distribute income?

National Bank Securities, as manager of National Bank mutual funds, seeks to limit the impact taxes will have on overall fund performance. Because funds are taxed at the highest rate and unitholders are generally taxed at a lower rate, there is an advantage to having the funds distribute income to the unitholders. National Bank mutual funds generate after-tax returns that are higher than if the income remained in the funds and the funds paid the tax on the income.

It is worth noting that if investments in National Bank mutual funds are made within registered plans such as RRSPs, RRIFs, RESPs, LIRAs, LIFs, or DPSPs, unitholders are not required to pay any income tax as long as the capital remains invested in these types of plans. However if the income is not distributed, the funds are subject to income tax which can negatively affect yields.

Moreover, the Income Tax Act allows mutual funds to claim a capital gains reimbursement. Therefore, National Bank Securities, using a calculation that takes into account the redemptions made by investors during the year, is able to maximize the reimbursement which allows for a certain amount of capital gains to be held within the funds. These non-distributed gains limit the unitholders' tax burden.

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3.3 Do unitholders receive the full distribution amount even if they've held their fund units for only part of the year?

Yes. On the distribution date, all unitholders on-record receive capital gains distributions in proportion to the number of units they hold. An investor who becomes a unitholder at the end of the year in a fund that makes its capital gains distributions at year-end, may have to pay taxes on capital gains that were realized before the actual investment date.

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3.4 How often do National Bank mutual funds make distributions?

Net income and net realized capital gains for each fund are calculated on the last valuation day of the period indicated in the following table. At such times, distributions will be paid out to investors who are holders of record on the distribution's record date and pro rata to the number of units they hold.

 

National Bank Mutual Funds

Net income distribution

Net realised capital gains distribution

Money Market Fund

monthly

monthly

Treasury Bill Plus Fund

monthly

monthly

U.S. Money Market Fund

monthly

monthly

Mortgage Fund

monthly

annually

Bond Fund

monthly

annually

Dividend Fund

quarterly

annually

Global RSP Bond Fund

quarterly

annually

Retirement Balanced Fund

quarterly

annually

Canadian Equity Fund

annually

annually

Canadian Index Fund

annually

annually

Canadian Index Plus Fund

annually

annually

Small Capitalization Fund

annually

annually

Global Equity Fund

annually

annually

Global Equity RSP Fund

annually

annually

International RSP Index Fund

annually

annually

American Index RSP Fund

annually

annually

American Index Plus

annually

annually

European Equity Fund

annually

annually

European Small Capitalisation Fund

annually

annually

Asia-Pacific Fund

annually

annually

Emerging Markets Funds

annually

annually

Quebec Growth Fund

annually

annually

Natural Resources Fund

annually

annually

Sector Rotation Fund

annually

annually

Future Economy Fund

annually

annually

Future Economy RSP Fund

annually

annually

Global Technologies Fund

annually

annually

Global Technologies RSP Fund

annually

annually

Strategic Yield Class Fund

monthly

monthly

National Bank Diversified Funds

Net income distribution

Net realised capital gains distribution

Secure Diversified Fund

monthly

annually

Conservative Diversified Fund

monthly

annually

Moderate Diversified Fund

quarterly

annually

Aggressive Diversified Fund

quarterly

annually

Intrepid Diversified Fund

quarterly

annually

National Bank Protected Funds

Net income distribution

Net realised capital gains distribution

Canadian Bond Protected Fund

annually

annually

Retirement Balanced Protected Fund

annually

annually

Growth Balanced Protected Fund

annually

annually

Canadian Equity Protected Fund

annually

annually

Global RSP Protected Fund

annually

annually

National Bank/Fidelity Funds

Net income distribution

Net realised capital gains distribution

Canadian Asset Allocation Fund

quarterly

annually

Global Asset Allocation Fund

quarterly

annually

International Portfolio Fund

annually

annually

Growth America Fund

annually

annually

Focus Financial services Funds

annually

annually

National Bank Institutional Funds

Net income distribution

Net realised capital gains distribution

Corporate Cash Management Fund

monthly

monthly

Treasury Management Fund

monthly

monthly

 

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3.5 Why does the unitholder have to pay income tax on income he/she never received in cash?

Most unitholders choose to automatically reinvest distribution income in additional fund units. These reinvested distributions are viewed as taxable income in the year they were made, and must be reported as such, even though the unitholder did not receive the distribution amount directly in cash. The tax treatment of reinvested distributions is the same as if the unitholder had received the distributions in cash and immediately purchased additional fund units. The advantage of automatically reinvesting distributions is that investors get to benefit fully from the effects of compounding growth on their investment. It is worth noting that the amount of distributions made increases the adjusted cost base and prevents double taxation when the units are redeemed.

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3.6 Must distributions made in U.S. dollars be converted into Canadian dollars?

Revenue Canada requires that all income be reported in Canadian dollars. T3 and Relevé 16 (Québec residents) tax slips issued by each fund are denominated in Canadian dollars. Distributions made by funds denominated in U.S. dollars are converted into Canadian dollars based on the average exchange rate determined each year by the Bank of Canada.

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3.7 How do distributions affect the net asset value per unit?

When a National Bank mutual fund makes a distribution, the net asset value of each unit decreases by an amount equivalent to the distribution per unit. However, the total value of the investment remains unchanged.

When a distribution is automatically reinvested, it is used to acquire additional fund units. The total value remains unchanged because the new asset value per unit is multiplied by the higher number of units.

If the distribution is paid out to the unitholder, the value of the investment is decreased by the amount of the distribution.

Here is an example to illustrate how this works.

Description

Calculation

Total value of investment

Before distribution

Unitholder has 100 units @ $10 per unit

$1,000

Distribution

$1 per unit
Unitholder receives $100 (100 units x $1)

 

Decrease in unit value

Fund's value per unit is now $9 ($10 - $1)

 

Reinvestment of distribution

Unitholder reinvests $100 by purchasing additional units @ $9 per unit.

Unitholder gets 11.111 new units ($100 , $9)

New total number of units equals 111.111 units (100 units + 11.111 units)

 

After distribution (with reinvestment)

Unitholder has 111.111 units valued at $9 per unit.

$1,000

After distribution (paid out)

Unitholder has 100 units valued at $9 per unit.
Unitholder received $100 in cash

$900
$100
= $1,000

Investors must understand that distributions are not a reflection of a fund's performance. In fact, a fund may make distributions even though certain investments generated losses that negatively affected its yield. Conversely, the absence of a distribution in any given year is not necessarily an indication of the Fund's negative performance during that year. The components of a fund's performance are described in the following table:

Components that affect a fund's performance

To be considered when distribution is made

Fund's net income

Yes

Gains realised from sale of investments

Yes

Unrealised gains from market appreciation of investments

No

Investors benefit from the compounding effect of tax-free unrealized gains until the investments are sold.
 

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3.8 How are distributions reported on income tax returns?

National Bank mutual funds issue supplementary T3 and Relevé 16 (Québec residents) tax slips which contain income tax information. These tax slips are only issued for non registered accounts. Distributions made to registered accounts (RRSPs, RRIFs, LIFs, LIRAs, DPSPs) are not taxable as long as they remain in these registered accounts.

National Bank Securities does not issue tax slips unless the distribution amount is equal to, or greater than, $100. Unitholders must still report distributions on their tax return even if they are less than $100. The distribution amount is indicated in the unitholder's account statement.

These tax slips do not show the amount of capital gains or losses realized from the sale or exchange of National Bank mutual fund units. See section on "Tax considerations of redemptions or exchange of National Bank mutual fund units" to learn more about the tax treatment of such gains.

The following example shows how and where unitholders are to report distributions on their tax return.

Assuming the unitholder receives $500 in distributions from a fund as follows:

 

Amount

Capital gains

$60.00

Dividend income

$120.00

Foreign non-business income (net amount*)

$85.00

Other income

$185.00

Return of capital

$50.00

Total

$500.00

*Gross amount of foreign non-business income ($100.00) less foreign withholding tax ($15.00).

Unitholders must report the amounts shown on supplementary tax slips T3 and Relevé 16 (Québec residents), by following the example shown in the following table.

T3 Slip

Box description

Report this 
amount in your 
tax return

Report on this 
line of your 
federal tax return

Box 21

Capital gains

$60.00

Line 32 of Schedule 3 - Capital Gains (or Losses)

Box 23

Actual amount of dividends

$120.00

Not reported

Box 25

Foreign non-business income

$100.00

Part II of Schedule 4 - Statement of Investment Income

Box 26

Other income

$185.00

Line 121, or Part II of Schedule 4 - Statement of Investment Income

Box 32

Taxable amount of dividends (125% of amount reported in Box 23)

$150.00

Line 120, or Part 1 of Schedule 4 - Statement of Investment Income

Box 34

Foreign non-business income tax paid

$15.00

Line 431 of Schedule 1 - Detailed Tax Calculation

Box 39

Federal dividend tax credit (13.33% of amount reported in Box 32)

$20.00

Line 425 of Schedule 1 - Detailed Tax Calculation

n/a

Return of capital (not indicated on back of T3 slip)

$50.00

This amount is not reported on income tax return

 

Relevé 16

Box description

Report this 
amount in your 
tax return

Report on this 
line of your 
Québec tax 
return

Box A

Capital gains

$60.00

Line 814

Box C

Actual amount of dividends

$120.00

Not reported

Box F

Foreign non-business income

$100.00

Line 130

Box G

Other income

$185.00

Line 130

Box I

Taxable amount of dividends (125% of amount reported in Box 23)

$150.00

Line 128

Box L

Foreign non-business income tax paid

$15.00

Only eligible for federal tax credit

Box J

Provincial dividend tax credit (8.87% of amount reported in Box I)

$13.31

Line 415

n/a

Return of capital (not indicated on back of Relevé 16)

$50.00

This amount is not reported on income tax return

 

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3.9 Do non-residents of Canada receive tax slips?

Non-residents who have a non-registered account do not receive a T3 or Relevé 16 tax slip. Instead, they receive an NR4 supplementary tax slip in which the taxable portion of the distributions is indicated. Based on the unitholder's country of residence, National Bank Securities must withhold 15% to 25% tax on distributions. Capital gains distributions and returns of capital are not subject to such withholding of tax.

Distribution amounts are shown in Box 16 "Gross Income". Tax on distributions that has been withheld by National Bank Securities remitted to Revenue Canada is indicated in Box 17. These taxes are generally deductible against tax payable in the country of residence.

For more detailed information, unitholders should consult a tax advisor.

Tax implications of a redemption or exchange of National Bank mutual fund units

Registered Accounts
Capital gains or losses from the sale of units are not taxable if the transactions are carried out within a registered account (RRSP, RRIF, RESP, LIF, LIRA, DPSP).

Non Registered Accounts
Unitholders who sell or exchange National Bank mutual fund units during the year must report the capital gains or losses attributable to such transactions on their income tax return if the units are held outside of a registered account. An exchange corresponds to the sale of units from one fund to purchase units from another fund. This transaction has the same tax implication as a straight sale.

Three quarters (75%) of capital gains realized on such transactions are taxable and must be reported as income in the year they were realized.

Calculating the capital gains or losses

To calculate the capital gain (or loss), the Adjusted Cost Base (ACB) must first be determined.

1. How is the ACB of a fund calculated?

The adjusted cost base of a mutual fund investment is equal to:

the total amount paid to purchase fund units

( + ) the amount of reinvested distributions (1)

( - ) the return of capital component of distributions (2)

( - ) the ACB of units previously redeemed

2. How are capital gains calculated?

The capital gain or loss incurred on the February 24th, 2003 transaction is calculated in the following manner:

Description

Amount

February 24, 2003
Proceeds from sale
(500 units @ $13/unit)
less adjusted cost base
(500 units @ $9.7689/unit)
Capital gain


6,500.00


($4,884.45)


$1,615.55

3. How can capital losses be deducted?

Capital losses can only be used to decrease or offset the capital gains realized in the three preceding taxation years. They can also be carried forward indefinitely to reduce any future capital gains.

To report a capital loss in a previous year, the unitholder must submit a T1A Form - "Request for loss carry-back" to Revenue Canada (TP-1.R, in Québec). Local taxation offices have copies of the necessary forms.

4. How must redemptions on U.S. dollar accounts be reported?

Redemption proceeds in U.S. dollars must be converted into Canadian dollars. The ACB of an investment must be converted into Canadian dollars based on the exchange rate in effect at the time of each transaction for purchases, reinvested distributions and return of capital component of distributions.

5. Capital gains Exemption

In his 1994 income tax return, the unitholder may have decided to realize capital gains on fund units that had accrued up to February 22, 1994. In this event, he has an exempt capital gains balance for each National Bank mutual fund he holds.

If the unitholder later chooses to redeem units and realises a capital gain, or if he was eligible to receive capital gains distributions, he can reduce the capital gains by an amount corresponding to the exempt capital gains balance for the fund. Unused exempt capital gains balance portions will expire at the end of the year 2004, at which time all unused balance amounts will be added to the ACB per unit.

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4 - Protected funds

4.1 What is a National Bank Protected Mutual Fund?

A protected mutual fund is a fund that allows investors to take advantage of the long-term growth potential of financial markets while guaranteeing their invested capital. In addition, the guarantee can be revised in order to protect capital growth as well.

More specifically, when your clients invest in National Bank Protected Mutual Funds, they are guaranteeing the invested capital over a 10-year period (or for their heirs in the event of their death). This is a way to increase the potential return on their investments without any risk of losing their capital.

All the advantages of National Bank mutual funds with a capital guarantee! Needless to say, National Bank Protected Mutual Funds are as accessible, flexible and practical as National Bank's other mutual funds. And investors can choose from among five funds, each with its own investment goals and policies.

In short, there are no acquisition or redemption fees and the fund can be transferred within the National Bank mutual funds family free of charge. The funds are eligible for our systematic investment plan with a regular contribution of as little as $25.

The funds are also RRSP-eligible (conventional or self-directed), and redeemable at any time giving investors access to their money within three days. They allow investors to take advantage of winning investment strategies that have been developed by specialists.

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4.2 Why were the funds created?

National Bank Protected Mutual Funds were created to meet the needs of investors who:

  • have never invested in mutual funds because they are worried about downward fluctuations in financial markets;
  • prudently invest in money market funds exclusively;
  • want to invest in the stock or bond markets, but are worried about market fluctuations;
  • want to increase the long-term return potential of their portfolio without any risk of capital loss at the end of a period of 10 years;
  • want to guarantee the amount of invested capital for their heirs;
  • are less than 70 years of age.
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4.3 What is the nature and scope of the guarantee?

National Bank Securities has concluded an agreement with National Bank Life Insurance Company (NBLI) to ensure that investors who buy units of National Bank Protected Mutual Funds benefit from a capital guarantee on a specific maturity date or in the event of their death. To fully understand the nature and scope of the guarantee, examples of 10 important features of the guarantee are provided below.

1. Guarantee Period

On January 20, 1998, a client invests $1,000 in a National Bank Protected Mutual Fund. The date of this first purchase of Protected Fund units is therefore the start of the guarantee period. As shown in the table below, the reference date corresponds to January 20, 1998. Reference year 1 will go from January 20, 1998 to January 19, 1999, and the maturity date will be the last day of the 10-year period following the reference date, i.e. January 19, 2008.

Any subsequent purchase of protected fund units during a given reference year will have the same maturity date. Consequently, purchases made on March 3, 1998 and January 15, 1999 will be included in reference year 1 and their maturity date will be January 19, 2008. Similarly, units purchased between January 20, 1999 and January 19, 2000 will be included in reference year 2 and their maturity date will be January 19, 2009.

Unit Purchase Date

Net Asset Value At Purchase

Reference Year

Reference Period

Reference Date

Maturity Date

January 20, 1998

$1,000

1

January 20, 1998 to January 19, 1999

January 20, 1998

January 19, 2008

March 3, 1998

$2,000

1

January 20, 1998 to January 19, 1999

January 20, 1998

January 19, 2008

January 15, 1999

$1,000

1

January 20, 1998 to January 19, 1999

January 20, 1998

January 19, 2008

February 10, 1999

$3,000

2

January 20, 1999 to January 19, 2000

January 20, 1999

January 19, 2009

April 5, 2000

$2,000

3

January 20, 2000 to January 19, 2001

January 20, 2000

January 19, 2010

2. Guaranteed Amount

The amount guaranteed at maturity or at death is equal to the total net asset value at the time of purchase of units of all protected funds purchased during the same reference year and which are still held by the unitholder at maturity or on the date of death.

Unit Purchase Date

Net Asset Value At Purchase

Reference Year

Reference Period

Reference Date

Maturity Date

January 20, 1998

$1,000

1

January 20, 1998 to January 19, 1999

January 20, 1998

January 19, 2008

March 3, 1998

$2,000

1

January 20, 1998 to January 19, 1999

January 20, 1998

January 19, 2008

January 15, 1999

$1,000

1

January 20, 1998 to January 19, 1999

January 20, 1998

January 19, 2008

Total guaranteed amount at maturity or on date of death

$4,000


Accordingly, on January 15, 1999, the amount guaranteed at maturity or in the event of death will be $4,000,which represents the total net asset value of units purchased during reference year 1, regardless of which Protected Fund(s) is/are involved.

3. Amount Paid at Maturity or at Death

NBLI will pay the unitholder or his/her legal heirs the guaranteed amount less the amount accrued at maturity or on the date of death. Graph 1 uses fictitious data to show the guarantee at maturity or on the date of death.

Funds_Graph1b.gif

According to the above graph, if the unitholder dies at the end of reference year 2*, the legal heirs are entitled to the guaranteed amount ($2,200) since the market value of the units accumulated on the date of death ($1,900) is less than the guaranteed amount. NBLI will then pay $300 to the legal heirs, i.e. the guaranteed amount ($2,200) less the market value of the accumulated units at the time of death ($1,900). On the maturity date** however, NBLI will pay the unitholder an amount of $100 representing the difference between the guaranteed amount ($2,200) and the market value of the accumulated units at maturity ($2,100).

4. Protection of Capital Growth

Up to twice a year, holders of protected fund units can reset the guaranteed amount so that they can protect the growth of their investments and increase the amount of the guarantee.

Resetting simply involves replacing existing guarantees with a new one. All the units held in all of the funds, regardless of their maturity dates, are then consolidated and the guaranteed amount is recalculated according to the net asset value of the units on the reset date. The unit value is based on the last valuation price. This date becomes the new reference date and the maturity date will be the last day of the 10-year period following the new reference date. Below is an example of voluntary resetting of reference dates. The values used are fictitious.

Funds_Graph2b.gif

If the guarantee is reset at the end of reference year 3*, the guaranteed amount at maturity date or on the date of death will be $2,300 compared to $2,000 initially. Protection of the investment is therefore enhanced. In addition, the maturity date is deferred and will correspond to the last day of the 10-year period following the reset date or the new reference date. If death occurs at the end of the second reference year**, the legal heirs will be entitled to the guaranteed amount ($2,300) since the market value of the units accumulated on the date of death ($1,900) is less than the new guaranteed amount. NBLI will then pay $400 to the legal heirs, i.e. the new guaranteed amount ($2,300) less the market value of the units accumulated on the date of death ($1,900). If the reference date has not been reset, NBLI will only pay $100 to the heirs, i.e. $2,000 less $1,900.

5. Impact of Reinvested Distributions on Guaranteed Amount

As shown in Table 3, regardless of the market value of the units, reinvested income distributions have no impact on the amount guaranteed at maturity or on the date of death because no distributions were cashed in.

Date

Net
Asset
Value
At Purchase

Amount of Reinvested Distributions

Number
of Units

Unit Value

Number
of
Units Held

Total Unit Value

Guaranteed
Amount at Maturity
or at
Death

January 20, 1998

$1,000

 

100,000

$10.00

100,000

$1,000

$1,000.00

December 31, 1998

 

$0.05 / unit

0.515

$9.70

100,515

$975

$1,000.00

Reference Year:

Reference Date:

Maturity Date:

January 20, 1998 to January 19, 1999

January 20, 1998

January 19, 2008

6. Impact of Partial Redemption of Units on Guaranteed Amount

Partial redemption of units reduces the guaranteed amount. The reduction is equal to a fraction of the guaranteed amount before the reduction and corresponds to the amount of redeemed units over the total unit market value of all funds on the redemption date. Based on the following example, a partial redemption of $100 in units on December 31, 2000 would reduce the guaranteed amount to $920 compared to $1,000 initially.

Date

Net Asset Value at Purchase

Amount of Redeemed Units

Total Unit Value Before Redemption

Total Unit Value After Redemption

Guaranteed Amount at Maturity or at Death

January 20, 1998

$1,000

 

 

N/A

$1,000

December 31, 2000

 

$1,250

$100

$1,150

$920

December 31, 2005

 

$1,500

$750

$750

$460

Reference Year:

Reference Date:

Maturity Date:

January 20, 1998 to January 19, 1999

January 20, 1998

January 19, 2008

Calculation of reduction in guaranteed amount as at December 31, 2000

$100
x $1,000 = $80
$1,250

7. Transfer Among Protected Funds

Unitholders may transfer all or part of their protected fund units to another protected fund without affecting the maturity date or guaranteed amount. However, the guarantee is cancelled if units are transferred from a protected fund to an unprotected fund.

 

8. Cost of Guarantee

The cost of the guarantee is reflected in the management fee, which is higher than that for an unprotected National Bank mutual fund. As these fees are deducted from the assets of each fund, the investor does not have to pay them directly.

The return on a National Bank protected mutual fund will be slightly lower than that on an equivalent fund which is not protected but the capital will be protected over the long term or in the event of death.


9. Main Limits on Guarantee

The guaranteed amount may not exceed $2,000,000 per unitholder. In addition, the guarantee in the event of death terminates at age 70. There is no time limit on the guarantee at maturity: it terminates on the date of the unitholder's death or on the date of the redemption in full of the units held.

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4.4 What are the Features of National Bank Protected Funds?

NATIONAL BANK Protected Funds

Canadian Bond Fund

Retirement Balanced Fund

Balanced Growth Fund

Canadian Equity Fund

Global RSP Fund

This Fund is right for investors whose investment objectives are :

High interest income, reasonable capital security, portfolio invested mainly in federal and provincial bonds

Regular interest and dividend income, prudent growth

Regular interest and dividend income, sustained growth

High capital growth, advantageous tax treatment

Superior capital growth

Volatility

         

Initial investment

$500

$500

$500

$500

$500

Subsequent investments

$50

$50

$50

$50

$50

Distribution of net income

Annually

Annually

Annually

Annually

Annually

Distribution of capital gains

Annually

Annually

Annually

Annually

Annually

RRSP or RRIF eligibility

100 %

100 %

100 %

100 %

100 %

Systematic investment plan

$25

$25

$25

$25

$25

Systematic Withdrawals A

$10,000

$10,000

$10,000

$10,000

$10,000

Systematic Withdrawals B

$50

$50

$50

$50

$50

Annual management fees

2.25 %

2.90 %

2.90 %

2.95 %

3.45 %

A - Minimum initial net asset value

 

B - Minimum periodic payment

 

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4.5 Do you have more questions?

If you would like more information on National Bank Protected Mutual Funds, feel free to contact our National Bank Funds Advisory Service at 1-888-270-3941 or (514) 871-2082.

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