Browse Analysis of Managed and Structured Products

17.3 Overview Of Mutual Funds

Learn about mutual funds, their advantages and disadvantages, different fund structures, and much more in this comprehensive guide covering various aspects crucial for a successful Canadian Securities Course certification exam.

Overview of Mutual Funds

Advantages and Disadvantages of Mutual Funds

A mutual fund is a single investment vehicle sponsored by an investment management company on behalf of many investors. By selling shares or units to a pool of investors, the fund raises capital, which is then invested according to the fund’s investment policies and objectives. The fund makes money from the dividends and interest it receives on the securities it holds. It may also earn capital gains from trading its investment portfolio.

Numerous mutual funds exist in the Canadian market and globally that cater to varied investment objectives. Some funds take a passive approach by replicating a stock or bond index. Others offer moderate risk and moderate returns by balancing investments between fixed income and equities. Still others may be very active by constantly trying to beat the market.

Types of Fund Structures

Mutual funds’ investment objectives are stated in a document called the Fund Facts document. This document discloses the degree of risk the fund is exposed to, the main types of securities held in its portfolio, and its historical returns, among other things.

Investors in a mutual fund become unitholders or shareholders in the fund. As such, they share in the income, gains, losses, and expenses the fund incurs in proportion to the number of units or shares they own. Professional money managers manage the assets of the fund by investing the proceeds according to the fund’s policies and objectives, and based on a particular investing style.

Mutual funds are sold in units or shares, depending on the structure, which are redeemable on demand at the fund’s current offering price. In the financial press, the offering price is expressed as the net asset value per share (NAVPS) or net asset value per unit. The NAVPS depends on the market value of the fund’s portfolio of securities at the time of redemption.

    pie title Distribution of Investment Types
	    "Equities": 45
	    "Fixed Income": 35
	    "Cash": 20

Did You Know?

The mutual funds industry in Canada has experienced tremendous growth since 1980. In that year, mutual fund net assets totalled $3.6 billion in Canada. By March 2020, mutual fund net assets under management were more than $1.45 trillion. For more information, the Investment Funds Institute of Canada releases monthly statistics and updates (www.ific.ca).

Key Considerations for Mutual Fund Sales Representatives

Individuals licensed to sell mutual funds must understand the types and amounts of risk associated with each fund. Financial services professionals assess each client’s profile to ensure that the mutual fund recommendations properly reflect that client’s risk tolerance and investment goals. Note that clients’ goals are not static, so the review process must be ongoing.

Proper diversification is essential, with a client’s portfolio containing a mix of cash or near-cash investments, equity investments, and fixed-income investments.

Glossary

Net Asset Value Per Share (NAVPS): The market value of a fund’s portfolio of securities at the time of redemption, expressed per share or unit.

Fund Facts Document: A regulatory document that discloses key information about a mutual fund, including risk, objective, and historical returns.

Frequently Asked Questions (FAQs)

1. What are the major advantages of investing in mutual funds?

  • Diversification: Mutual funds allow investors to diversify their portfolios by pooling funds and investing in a variety of assets.
  • Professional Management: Funds are managed by professional fund managers, allowing investors access to expert management.
  • Liquidity: Mutual fund shares or units are redeemable on demand, providing flexibility to investors.

2. What risks are involved in mutual fund investment?

  • Market Risk: The value of mutual funds can fluctuate with market changes.
  • Credit Risk: For funds investing in bonds, credit rating changes can affect the bond values.
  • Interest Rate Risk: Fluctuations in interest rates can impact both equity and fixed-income investments.

Key Takeaways

  • Mutual funds pool money from multiple investors to invest in various securities, aligned with predefined investment policies and objectives.
  • Investments in mutual funds offer advantages such as diversification, professional management, and liquidity.
  • Understanding the NAVPS, Fund Facts Document, and the roles of money managers are crucial concepts for mutual fund sales representatives.
  • Ongoing assessment and proper diversification of client portfolios are key responsibilities of mutual fund advisors.

📚✨ Quiz Time! ✨📚

🧐 Assess and Solidify Your Understanding

Welcome to the Knowledge Checkpoint! You’ll find 10 carefully curated quizzes designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you’re on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck! 🍀💪

## What is a mutual fund? - [ ] A single stock investment - [ ] A loan provided by banks - [ ] Insurance policy for investors - [x] A single investment vehicle sponsored by an investment management company for multiple investors > **Explanation:** A mutual fund is a collective investment vehicle sponsored by an investment management company that pools capital from multiple investors to invest in securities according to the fund's investment policies and objectives. ## How do mutual funds generate income? - [x] Dividends and interest from securities and capital gains from trading - [ ] By charging high fees to investors - [ ] Through savings accounts - [ ] Through property rentals > **Explanation:** Mutual funds generate income from the dividends and interest they receive on the securities they hold, and from capital gains earned from trading their investment portfolios. ## What document outlines the investment objectives and risks associated with a mutual fund? - [ ] Fund Report - [ ] Annual Prospectus - [x] Fund Facts document - [ ] Investment Summary > **Explanation:** The Fund Facts document discloses the mutual fund's investment objectives, the degree of risk, the main types of securities held in the portfolio, and historical returns. ## What do investors become when they invest in a mutual fund? - [ ] Lenders - [ ] Policyholders - [x] Unitholders or shareholders - [ ] Creditors > **Explanation:** Investors in a mutual fund become unitholders or shareholders, meaning they share in the income, gains, losses, and expenses the fund incurs in proportion to the number of units or shares they own. ## How is the offering price of mutual fund units or shares expressed? - [ ] Market price per share - [ ] Book value per share - [ ] Trading value per unit - [x] Net asset value per share (NAVPS) > **Explanation:** The offering price of mutual fund units or shares is expressed as the net asset value per share (NAVPS) or net asset value per unit, which depends on the market value of the fund’s portfolio at the time of redemption. ## What is an important aspect for mutual fund sales representatives when recommending mutual funds? - [x] Assessing each client's risk tolerance and investment goals - [ ] Focusing solely on funds with the highest returns - [ ] Encouraging investment in one type of security - [ ] Pushing clients to trade frequently > **Explanation:** Mutual fund sales representatives must carefully assess each client's profile to ensure the recommended fund aligns with the client's risk tolerance and investment goals. Constant review is essential as goals and objectives can change over time. ## What was the total net assets of mutual funds in Canada by March 2020? - [x] Over $1.45 trillion - [ ] Under $500 billion - [ ] Exactly $1 billion - [ ] $500 million > **Explanation:** By March 2020, the total net assets of mutual funds in Canada surpassed $1.45 trillion, reflecting significant growth from $3.6 billion in 1980. ## What does proper diversification of a client's portfolio involve? - [ ] Investing solely in fixed-income investments - [x] Allocating among cash/near-cash, equity, and fixed-income investments - [ ] Focusing only on equity investments - [ ] Investing exclusively in high-risk funds > **Explanation:** Proper diversification involves allocating a client's portfolio among cash or near-cash investments, equity investments, and fixed-income investments to mitigate risk and enhance potential returns. ## What is the role of professional money managers in mutual funds? - [ ] Advising clients directly on which mutual funds to buy - [ ] Setting regulatory policies - [x] Managing assets according to fund policies and objectives - [ ] Overseeing compliance requirements > **Explanation:** Professional money managers manage the assets of the mutual fund according to its investment policies and objectives, using a specific investing style to achieve these goals. ## What is the term used to refer to investment advisors licensed to sell mutual funds in this course? - [ ] Financial Analyst - [ ] Portfolio Manager - [x] Mutual fund sales representative - [ ] Financial Planner > **Explanation:** In this course, the term "mutual fund sales representative" is used to refer to investment advisors who have met the regulatory requirements to sell or advise on mutual funds. The industry may also use the term "dealing representative."

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In this section

  • 17.3.1 Advantages Of Mutual Funds
    Explore the numerous benefits of investing in mutual funds including low-cost professional management, diversification, liquidity, and more.
  • 17.3.2 Disadvantages Of Mutual Funds
    Explore the key disadvantages of mutual funds including associated costs, short-term unsuitability, systematic risk, and tax complications. Gain detailed insights to better inform clients.
  • 17.3.3 Mutual Fund Structured As Trust
    Learn about the structure and advantages of mutual funds structured as trusts, focusing on their tax benefits, roles and responsibilities, and investor rights.
  • 17.3.4 Mutual Fund Structured As Corporation
    Explore the setup, conditions, advantages, and taxation aspects of mutual funds structured as a corporation, including investor benefits, financial conditions, and dividend strategies.
  • 17.3.5 Organization Of Mutual Fund
    Understand the structure and key roles within a mutual fund, including directors, fund managers, distributors, and custodians. Learn about their responsibilities and how they interact to ensure the proper management and performance of the fund.
Sunday, July 14, 2024