Mutual Funds Explained

Mutual funds are created on the basis of investorsí money being pooled into a fund, with units representing interest in the fund distributed to investors proportional to the amount invested.

New units are continually issued as investors deposit money into the fund, while units are eliminated when investors decide to leave the fund. Fund units may be bought or sold at any time at their market value as of that day, except for money market funds, which have a fixed value.

Investors in a mutual fund pay an annual fee to the fund to cover compensation paid to the professional managers of the fund.† This fee is deducted annually directly from the fundís assets, and thus reduces the unit value of the fund. When this fee is expressed as a percentage of the fundís value, it is known as the management expense ratio, or MER. The MER between funds can vary greatly and is an important piece of information to have about a fund before investing.

The professional investment managers make the decisions about what to invest in, when to buy and sell holdings within the fund, the allocation and diversification of holdings, and many other factors that affect volatility and returns.

Mutual funds are offered for sale by banks, credit unions, caisses populaires, investment dealers, and mutual fund companies. They can even be purchased online with some institutions.

Mutual funds also offer a variety of withdrawal plans. The investor may, of course, redeem his or her investment as a lump sum, but may also redeem a specified amount or spread out redemptions over a period of time.

Mutual funds in Canada are highly regulated, and performance data is easy to acquire. Mutual funds are issued by prospectus and it is important to note that returns are not guaranteed and principal is not guaranteed.† Unit values fluctuate in value and investors may pay commissions to buy and/or redeem and sell mutual funds.† Investors should always read the prospectus prior to making an investment into a mutual fund.

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