Investment Funds

An investment fund is a pool of money from many investors. It’s managed by a professional money manager and has a specific investment objective. The fund manager uses different investment vehicles (such as, stocks or bonds) to achieve the fund’s objectives. Individual investors may participate by purchasing units or shares of the fund. The following table lists access requirements, fees and features of various types of investment funds.

 

Mutual Fund

Segregated Fund

Employer Group Retirement Plan Segregated Fund

Institutional Fund

Exchange Traded Fund (ETF)*

Access

Fully accessible to anyone with minimal money to invest (e.g., $100)

Fully accessible to anyone with minimal money to invest      (e.g., $100)

Members of an employer group plan

Investors who meet the fund’s dollar minimum (e.g., $100,000)

Requires a brokerage account

Fees

Variable; generally mid-range

High

Generally low

Low

Generally low; actively managed ones may be higher

Features

Widely available

Mimics an underlying mutual fund

 

A guarantee to return 75% or 100% of the original investment after a period of time, if you have lost money

Mimics an underlying mutual fund

 

Fees are lower than retail mutual funds and dependent upon the assets in the employer’s group plan

 

Usually highly diversified to optimize risk and return

 

Low operating costs

 

 

A stock that resembles an investment fund

 

It trades on a stock exchange

 

 

 


* What’s an ETF? Click the link to learn more.

Advantages of Ownership

Asset Protection

Asset protection may not be guaranteed, depending on the fund’s mandate. With the exception of money-market type, unit values rise and fall based on the value of the underlying securities.

Diversification

Your money, along with that of other investors, is divided into a wide cross-section of permissible investments, which lowers the risk because you haven’t put all your eggs in one basket. Examples are bonds in a bond fund and company shares in an equity fund.

Liquidity

You can redeem your units/shares at any time based on the current unit price. An investment fund manager typically sends you the value of your redeemed units/shares within three days of the trade day.

Convenience

Units of mutual funds are easy to buy. Most mutual funds require a minimum of $500 to open up a plan or $25 per month on a monthly deposit plan. You can make additional contributions in any denomination you wish.

Employer group plans may allow contributions through payroll deduction.

Other investment funds may require higher minimums. They may or may not permit monthly contributions.

Accessible

Most funds do not trade on stock exchanges. Funds can be bought or sold through the company administering the fund or through stockbrokers, investment fund dealers, banks, trust companies or life insurance companies.

Tax Advantages

Funds may earn interest, dividend income and/or capital gains. Any investment income paid from funds held in registered plans and accounts is tax-sheltered.

In non-registered accounts, interest is taxed at a higher rate. Capital gains are generally deferred until you cash out.

Exchange Privileges

Most fund companies have different funds for different purposes. Together, these funds make up a family of funds. Most companies allow investors to move from one fund to another (within a family) without penalty.

Members of employer group savings plans may usually move between funds at no cost, subject to a frequent trading fee.

How Safe Is Your Money?

A fund manager uses a custodian, which is a bank or trust company, where the securities of the fund are held for safekeeping, separate and distinct from the fund company.


Types of Investment Funds

It likely comes as no surprise to hear that investment funds come in many types and styles. Being able to distinguish between the different types is essential when navigating through the world of investing. Funds may consist of equity investments, debt investments, real estate or a combination of all three. Each fund is identified by its investment objective. Your task is to select the fund that best approximates your personal investment objectives.

Mutual funds can be characterized by the type of investment return (interest, dividend, capital gains or a combination) that the funds generate. Funds are further characterized as having high, intermediate or low variability. Variability or volatility refers to the fluctuation in a fund’s rate of return from year to year. Most people equate volatility with risk: the higher the volatility, the higher the risk.

A mutual fund is attractive to some investors for the following reasons:

  • No investment experience or expertise is required to analyze the individual holdings (such as, stocks or bonds).
  • Few demands are made on your time to manage your investment.
  • You have both a liquid and a diversified investment.

While it’s necessary to pick funds based on the asset class you want or need, it’s also necessary to choose between specific asset class funds and pre-built portfolio funds (with multiple asset classes) and the manager’s style. Develop your fund-picking skills. Learn how to identify a fund by its characteristics.

Asset Class by Asset Class

Pre-Built Portfolio

Management Style

  • Specific asset class funds
  • Specific asset class sub-category funds

     
  • Balanced funds
  • Asset allocation funds
  • “Fund of funds” funds
  • Target (retirement) date funds
  • Actively-managed funds
  • Techniques and strategies
  • Passively-managed (Index) funds