What are mutual funds?

What’s a mutual fund?

A mutual fund is a type of investment fund, a financial vehicle that lets you pool your money with other investors to make it grow. It can contain several categories of assets, such as stocks, bonds and Treasury bills. In exchange for your contribution to an investment fund, you receive shares in it, which are known as securities. 

There are two main types of investment funds: 

1. Mutual funds 
2. Exchange-traded funds (ETFs) 

​​→ ​Read our article to learn more about ETFs 

Although these two types of investment funds are based on the same principle, each works in its own way. This article focuses on the specific features of mutual funds. 

How is a mutual fund managed?

Mutual funds are professionally managed. Fund managers select investments and carry out transactions with the aim of making the money you’ve invested grow. These specialists build their portfolios according to specific investment strategies and objectives.  

Fund managers can adopt one of two approaches:  

• Active management, which consists of building a portfolio by selecting assets that outperform a benchmark index. 
• Passive management, which aims to mimic the composition of a benchmark index, such as the TSX or Dow Jones, to create what’s known as an index fund. 

→ Check out our article on how the stock market works 

A fund may have one of the following investment objectives: 

• Capital growth, which aims to increase the value of the sums invested as much as possible. 
• Capital preservation, which seeks to maintain the value of the sums invested. 
• Income generation, which seeks to produce regular and constant income. 

What returns can a mutual fund generate?

When you contribute money to an investment fund, you earn a return proportional to the number of shares you hold. A mutual fund’s distribution, i.e., the income it generates, comes from various sources: 

• Dividends
  These are profits that companies pay out to their shareholders. When you invest in a mutual fund, you can receive dividends from every share you hold in a company.  
• Interest
  An investment fund is made up of certain types of assets, such as bonds and Treasury bills, which generate interest.  
• Capital gains
  Returns can also take the form of capital gains when a fund manager sells securities, such as stocks, at higher prices than they were purchased at. 

How can you determine the value of a fund? 

You can easily check the value of a stock or share in a mutual fund on a financial website. 

→ Visit the National Bank Direct Brokerage platform. 

The value of a fund is calculated once a day on the basis of returns achieved and the market value of the investments it contains, such as stocks or bonds. In practical terms, this means you can check the value of your shares (securities in the fund) on a daily basis.  

What are the advantages of a mutual fund?

It can be profitable to invest in a mutual fund. Here are some good reasons to opt for this type of investment:  

• Diversification
  A mutual fund allows you to invest reasonable amounts in a wide variety of securities, thus respecting your savings capacity. It would cost a lot to invest in such a diversified portfolio under other circumstances. This diversification helps protect your investments from the risks associated with stock market volatility.  
• Professional management
  Do you lack the time, motivation or interest to select securities and make transactions? Our fund managers will set up and look after your funds, ensuring your peace of mind. 
• Flexibility
  Do you need access to cash? You can sell your shares in a mutual fund at any time. In general, you can also transfer money from one fund to another within the same institution, depending on your needs and financial situation. For example, if you’re going through a more precarious period, you can withdraw money from a riskier fund and invest it in one that’s less risky. 
• Different levels of risk
  Each fund is constructed according to different investment objectives and strategies. Depending on your investment profile and risk tolerance, you may opt for a balanced fund or one with a higher level of risk. 

How do you invest in a mutual fund?

Are you thinking of investing in a mutual fund? You can do so through one of the following two options:  

Your financial institution

Most financial institutions offer a wide range of funds to meet different needs. Your advisor can recommend funds that reflect your goals and arrange for you to purchase shares in the fund of your choice. 

An investment platform

You can also invest in a mutual fund on your own through a self-directed investment platform, such as National Bank Direct Brokerage.

How do you choose a fund that suits your needs?

To find a fund that’s right for you, it’s essential to first determine your investor profile. This will enable you to make an informed choice that best suits your objectives.  

To determine your profile, ask yourself the following questions: 

• Is your risk tolerance low, moderate or high?
• What’s your investment horizon? Do you want to invest for the short, medium or long term? 
• What are your financial goals? Are you saving for retirement, to buy a house or for a specific project? 

The answers to these questions can guide you or your advisor towards a fund that meets your needs. 

What are the different types of mutual funds?

The different types of mutual funds are: 

• Fixed-income funds
  Generally made up of debt securities such as bonds, debentures or preferred shares issued by companies, these funds offer regular income in the form of interest or dividends. Although their yield is relatively modest, fixed-income funds provide stable income and low risk.
• Balanced funds 
  Balanced funds are made up of equities, bonds and money market securities, which you can allocate according to your risk tolerance. The diversification of balanced funds gives them a certain stability of return while presenting a moderate risk. 
• Money market funds 
  These include bonds and short-term debt securities issued by companies or governments (e.g., Treasury bills). Generally speaking, it’s advisable to invest your money temporarily in a money market fund to earn interest before investing it somewhere else over the long term. The returns generated by money market funds aren’t high, but they’re secure and low-risk. 
• Specialized funds 
  These funds invest in a specific sector of activity (precious metals, technology, etc.) or in a certain region of the world through company shares. Because they’re focused sectorally and/or geographically, they offer less diversification and their performance is heavily influenced by the global context and economy. Specialized funds present a fairly high level of risk, and their returns depend on stock market conditions and currency fluctuations.
• Index funds 
  These are investments that replicate the composition of a specific index, for example, a stock market indicator such as the NASDAQ or the Dow Jones, and are therefore subject to the same fluctuations. The risk and return of index funds closely mirror those of the chosen index. 

Mutual funds are a good way to invest your savings while benefiting from a diversified portfolio and professional management. Flexible and diverse, they adapt to your objectives and risk tolerance.