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Mutual Fund Guide

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Mutual Funds allow the investor of modest means the same access to securities as the institutional investor—access to stocks and bonds from many different companies. Beginning early in the 20th century, mutual funds achieved this by spreading an investment over a number of different stocks. What are the benefits?

Professional management.
Each fund has a knowledgeable portfolio manager or a team of managers that work full-time on the investor's behalf, with expertise in selecting suitable securities of many companies and/or governments. The average investor, who buys stocks and bonds, does not have the necessary time to assess securities, nor the expertise to make qualified investment decisions; thus he indirectly hires the fund's manager to make these decisions.

Ease of investing.
Automation can help you beat any habit of procrastination that might otherwise hold you back from achieving financial independence. With as little as $50 to $100 per month you can automatically pay for a pre-selected mutual fund purchase, directly from your bank account. You can also get started by investing a lump sum.

New investment capital can be added to a mutual fund.
As long as you meet the minimum (if any) investment amount, you can easily add new purchases to your account at any time. For example, if you invest an additional $500 (net after any sales commissions) in a fund selling at $10 a unit, the fund credits your account with 50 new units ($500 divided by $10 = 50).

Simplicity of transaction.
Fund units can be purchased or sold easily, offering a liquid form of investment, assuring ready access to capital in the case of an emergency. Within a fund family, monies can be transferred from fund to fund without penalty.
Immediate diversification among securities.
Even with a small investment of $1,000, your capital can purchase units of mutual fund trusts (or shares of mutual fund corporations), representing a proportionate ownership of all the securities held by the fund. Even with a limited investment of $1,000, your capital can purchase fund units that represent a variety of companies spread across many different sectors of the economy.  Furthermore, to help mitigate risk,  a fund may invest no more than 10% of its assets in any one security, except for government securities.

Past performance is obtainable from public records.
Mutual fund data services, fund companies, newspapers and websites all record and offer reports of the performance of mutual funds. It is the practice of most mutual fund consultants to offer a monthly or quarterly report on portfolio performance.

Efficiently re-invest dividends.
A mutual fund can automatically reinvest all your dividends and interest earned, which can add nicely to your future profits.

Automatic withdrawal plans.
Most funds allow you to redeem units at pre-selected intervals to create income. You can set up regular transfers to your bank account that accommodate your various income needs during different periods of your life.

Industry regulation.
The Mutual Fund Dealers Association (MFDA) now regulates the distribution of mutual funds. Detailed rules govern how mutual funds are sold to the investor, with an emphasis on assisting the consumer to meet his or her investment goals.

RRSP and RRIF eligible.
Domestic mutual funds with Canadian securities and foreign funds are fully RRSP and RRIF eligible. Depending on your tolerance for volatility, mutual funds can allow your long-term retirement portfolios to contain a wide array of stocks in various securities worldwide. You can even diversify your RRSP and/or your non-registered fund portfolio by owning up to 100% of a portfolio in funds holding foreign securities.

A great RESP tool.
You can start investing in mutual funds for your child's education long before he or she reaches college or university age. Small monthly investments can add up over time to cover all or part of the following costs: tuition, books, accommodation, a cafeteria food plan or weekly groceries, a car payment plus insurance and gas or public transportation, furniture, a telephone, and of course spending money.

Both your contribution and the government's grant are invested in the RESP. The added benefit of reinvesting the 20% government grant automatically in the mutual fund creates even more compounding. The RESP will grow tax deferred until your student needs it.

Consider using mutual funds in a TFSA (Tax Free Savings Account).
The TFSA is a great investment if you are a member of a pension plan and have minimal, if any, room to invest in your RRSP due to a high pension adjustment (PA) factor. You can supplement your retirement savings through the TFSA. After-tax investments grow tax deferred and there is no taxation on withdrawal.

Thousands to choose from.
Every type of investment fund—including equity funds, bond funds, diversified funds, balanced funds, and international funds—give you access to investments in the world's strongest companies.

International diversification among foreign securities.
Although Canada has a strong economy and is a G5 nation, it represents approximately 3% of the capitalization trading in non-domestic markets. The U.S. offers access to the highest capitalization in the world, while tremendous investment opportunity lies outside of North America—accessible via mutual funds.

Financial Consultation.
Your financial advisor can help you design your mutual fund portfolio and review it with you on a regular basis. Most advisors offer the majority of the better-performing funds—with both foreign and Canadian securities included, including a wide range of international and global funds.



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