In this our latest post in the Investments at a Glance series, we look at investment funds.
Investment funds are a collection of investments from one or more asset classes. Each fund focuses on specific investments, like government bonds, stocks from large companies, stocks from certain countries, or a mix of stocks and bonds.
When you buy an investment fund, you’re pooling your money with many other investors. The main advantages are that you can invest in a variety of investments for a relatively low cost and leave the investment decisions to a professional manager.
Investment funds can be set up as trusts, corporations or partnerships. They are issued in units if they are set up as a trust or partnership, and shares if they are set up as a corporation. Returns can include distributions to investors of dividends, interest, capital gains or other income earned by the fund. You can also have capital gains (or losses) if you sell a fund for more (or less) than you paid for it.
The most well known type of investment fund is a mutual fund. A mutual fund is a fund that continually issues units or shares to investors.
Mutual funds are widely available through investment firms, fund companies and banks, and are easy to buy and sell. When you buy or sell units or shares of a fund, you receive the current value of the fund. This is called the “net asset value” or NAV.
You may have to pay fees to buy or sell your fund, switch between funds, or fees to hold funds in a registered plan. The fund pays management fees, operating expenses (or a fixed administration fee), trailing commissions (paid from management fees) and incentive fees. The fees and expenses a fund pays are deducted from the fund’s assets. They reduce the returns you get on your investment.
The level of risk and return involved depends on what the fund invests in: lower for a fund investing in fixed income, higher for an equity mutual fund. Mutual funds are not guaranteed.
As a fund owner, you have the right to vote on major decisions about the fund.
This was the tenth post in out Investments at a Glance summer series. Stay tuned for a closer look at segregated funds, closed end funds, and exchange traded funds.
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{ 2 comments… read them below or add one }
One thing I would advise buyers of mutual funds….really take a close look a the management fees and the cost of those “trailing commissions”. They can really reduce the net interest gains on the fund.
Can’t wait for the ETF post. They seem to be the hot thing right now, as people shy away from mutual funds’ relatively high MER.