Mutual Funds

Investing in a mutual fund is a cost-effective and efficient way for the average investor to invest in a professional, diversified mix of investments along with of other investors sharing similar investment goals.

Each mutual fund has an investment mandate which can be fairly broad allowing for investments in a variety of different asset classes or have a focused and specific mandate. The three basic asset classes are equities, fixed income and cash. Some funds will invest in a mixture of all of these, others will invest primarily in one of these asset classes.

The asset classes can be divided into sub-categories. 

Fixed income assets include Canadian bonds and global bonds. Within the Canadian bonds category, there are Federal, provincial, municipal and corporate bonds.

Equities can be broken down by geography (Canadian, US and overseas), style (such as growth or value), market capitilization (large cap or small cap stocks).

Each asset class and sub-class has its own level of risk and volatility (how much something goes up or down in value). By selecting a mutual fund or a portfolio of mutual funds that have broad, diversified mandates, the amount of risk and volatility can frequently be contained within a narrow range due to the different attributes of each class.

There are also restrictions on mutual funds in Canada set out by regulatory authorities, which limit the amount of exposure to any individual security. This helps to reduce the business risk of investing excessively in a company (and suffering a big loss if that company fails).

A very important role for your financial advisor is to help you adopt the asset mix appropriate for your portfolio based on your own invesrtment objectives and risk tolerance.