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Demystifying Mutual Funds
If you contribute to a pension plan, you
are no doubt familiar with mutual funds. Highly popular with investors, these
investment solutions aim to provide sound portfolio diversification and are
designed to correspond to different risk profiles.
Although they are relatively simple to use, particularly because purchasers do not need to select investments individually or have in-depth investment knowledge, there is a broad range of mutual funds available on the market. It is essential for investors to understand the differences in order to make the right choice.
A multitude of funds for a multitude of needs
Before investing in a fund, you need to understand its objectives and investment strategies and the risks associated with it.
Money market and fixed-income funds
Among the major mutual fund categories are money market funds and fixed-income funds. These vehicles aim to provide a certain measures of security for the invested capital and regular interest or dividend income. Investors typically choose them when they are looking to minimize the risk of losing capital while seeking additional income, for example someone interested in a phased retirement.
These funds are designed to grow investors' capital over the medium to long term, while striving to preserve the invested funds during economic slowdowns. They offer an attractive risk/return compromise for investors looking to increase their assets without sacrificing peace of mind.
Canadian, U.S., international and emerging market equity funds.These mutual funds offer impressive capital growth potential, but also involve a higher level of risk. These solutions are generally recommended for investors who can tolerate sizeable return fluctuations and who have a long-term investment horizon.
Naturally, each of these major families is made up of numerous mutual funds with different risk/return profiles to address different needs
Simple, diversified and flexible
One of the main benefits of mutual funds is that they are overseen by veteran portfolio managers. The investments they choose are carefully selected to meet the funds’ objectives and characteristics to allow investors to benefit from their knowledge and expertise.
In addition to professional management, mutual funds provide sound diversification, as they typically invest across several economic sectors and asset classes at the same time. That way, if the return on one security is disappointing, the superior return generated by another can help offset it.
Moreover, mutual funds offer greater flexibility and allow for systematic investments or withdrawals. Investors can also transfer their savings at any time to another fund in the same family with the same fee structure to adapt their approach to markets as their situation changes.
A few words of caution
Obviously, investments in mutual funds are not free of risk. Every fund has risks based on its own makeup. It is essential to properly evaluate the risks associated with the funds that interest you.
Mutual funds are overseen by portfolio managers who use different management styles. There is no right or wrong management style; in fact, they all complement one another. But depending on economic cycles, some will have better results.
As it is difficult to predict how markets will behave, it is preferable to have a portfolio containing mutual funds with different management approaches, while making sure that the combination of them properly reflects your choice of risk profile.
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