By: Antonio Q  

Well hello readers. Today I want to take the time to explain to you what mutual funds are, what they do and why you should invest in them.

• The definition of mutual funds.
Mutual funds is money invested in by many investors witch a mutual fund manager takes all the money and invest the money in bonds, stocks, real estate (for example mortgage) and to make you profit. The mutual fund manager(s) of the fund that the investors are investing in get their cut by taking a percentage of the profit.

In Canada the MER (Management Expense Ratio) fee is usually 2-3%. You can get a lower MER fee by buying index funds or ETF but I will talk about that another day. In the US the MER is on average lower than Canada. The main reason for this is the population size. More clients = more revenue = able to lower MER fees.

• Type of mutual funds
There are several type of mutual funds for everyone. You can buy an income fund, US Equity fund, International funds.

• Mutual fund better than a single stock
Mutual funds could be mainly stocks, bonds etc…but the great thing about mutual fund is that you don’t need to be rich to start investing. Unlike stocks where you have to pay a brokerage fee of 20$ (some are less) plus a percentage per share, most mutual funds have no other fees than the MER and witch is taken before showing you your interest you made

Also when you buy a mutual fund the manager of the fund invest in several stocks, bonds etc…So if one stock in your mutual fund goes down sharply in value you would not lose most of you investment vs. investing all your money on one stock.

• Investing in a portfolio package
Most Canadian (The US banks should also offer these) banks (if not all) now offer a mutual fund portfolio witch the package usually includes anywhere from 3 to 7 mutual funds. The beauty of these packages is that the bank does the work of rebalancing your ‘investments basket’ if one of the mutual fund goes -/+ 2.5%. (Of course the 2.5% could be different, it could be 3% maybe 4%) the mutual fund manager of the portfolio will rebalance your funds as to your objective.

For example: Lets say your portfolio has 4 funds; fund A, B, C and D and they are all 25% each of your asset allocation (In quick terms you have a pie cut in 4 pieces). If fund A for example would grow in value so much that it is now worth about 30% of you asset allocation then the mutual portfolio manager would recalibrate your funds so they all go back to their 25% allocation.

Most banks do the relocation f you portfolio assets every 3 months.

• Why is a portfolio package a good choice

First reason is simply it saves you time. Without the bank recalibrating your mutual funds you would have to do it about once a year (you don’t have to but you should)

Your investments can grow better. In the example above most novice investors would think “why would you sell those extra shares to recalibrate?’. The reason is simple; if you put all your money in one fund and it goes down then you lost money but if you recalibrate your funds then you have a better chance that they will all grow, but if one would go down you would still be ahead if the game.

One friendly advice. NEVER Invest all you money in one fund. The key is diversification