Understanding mutual funds

Understanding mutual funds

What is a mutual fund?

A mutual fund is a type of investment 
fund. An investment fund is a collection of 
investments, such as stocks, bonds or other 
funds. Unlike most other types of investment 
funds, mutual funds are “open-ended,” which 
means as more people invest, the fund issues 
new units or shares.
A mutual fund typically focuses on specific 
types of investments. For example, a fund 
may invest mainly in government bonds, 
stocks from large companies or stocks from 
certain countries. Some funds may invest in 
a mix of stocks and bonds, or other mutual 
funds.
Why invest in mutual funds?
When you buy a mutual fund, you’re 
pooling your money with many other 
investors. This lets you invest in a variety 
of investments for a relatively low cost. 
Another advantage is that a registered 
portfolio manager makes the decisions 
about specific investments. 
Also, mutual funds are widely available 
through financial planning firms, 
brokerage firms, credit unions, trust 
companies and other investment firms. 
You can buy or sell funds at any time. 
Other things to consider
Like all investments, mutual funds 
have risk—you could lose money on 
your investment. The value of most 
mutual funds will change as the value 
of their investments goes up and down. 
Depending on the fund, the value could 
change significantly and frequently.
Also, there are fees that will affect the 
return you get on your investment. Some 
of these fees are paid by you, and others 
are paid by the fund.

Your return will also depend on the portfolio 
manager’s skill at picking investments. Some 
studies show that most mutual funds are 
unlikely to consistently perform better than 
their benchmark over the long term.

The importance of diversification
Mutual funds can make it easy and affordable to 
own a variety of investments. Not all investments 
perform well at the same time. Different 
investments react differently to world events, 
factors in the economy like interest rates, and 
business prospects. So when one investment is 
down, another might be up. 
Having a variety of investments can help offset 
the impact poor performers may have, while 
taking advantage of the earning potential of the 
rest. This is called “diversification.”
What’s a benchmark?
Typically, a benchmark is a market or sector 
index against which the performance of the 
mutual fund can be measured. For example, if 
a fund invests mainly in Canadian stocks, the 
benchmark might be the S&P/TSX Composite 
Index, which tracks companies trading on the 
Toronto Stock Exchange. 
By comparing a fund to an appropriate 
benchmark, you can see how the investments 
held by the fund performed compared to the 
market or sector in general.

What do mutual funds invest in?

This table shows some of the common types of mutual funds and what they 
typically invest in. For more information about different kinds of investments and 
how they work, read the CSA’s A Guide to Investments.

Understanding mutual funds