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Many of us have heard of mutual funds but don’t know what they are and why they may make a suitable investment option. Although rates of return are not guaranteed when investing in mutual funds, their broad diversification and professional investment management provide investors with long-term growth potential and income sustainability – critical components of a retirement plan.
Mutual funds are a type of investment fund, a collection of Canadian and global investments such as stocks, bonds, real estate, commodities, and even other mutual funds. Rather than investing in stocks and bonds on your own, through a mutual fund, we combine your money with other investors, and you purchase various investments together. Your rate of return depends on how well the holdings that went into the mutual fund perform.
“With mutual funds, investors pool their money together and have a professional portfolio manager make the investment decisions on their behalf,” says David MacRae, Director, Wealth & Advisory Services at Cambrian Credit Union and Branch Compliance Manager at Credential Asset Management Inc. “The portfolio manager provides ongoing research and monitoring of the investments allowing the mutual fund unit holders more time to spend with family or on hobbies important to them.”
You can hold mutual funds inside registered accounts such as your RRSP, TFSA, RESP or RDSP, in addition to non-registered investment accounts. This fact appeals to many investors.
Mutual funds are attractive to investors for several reasons.
A portfolio manager actively manages your investment. The portfolio manager identifies opportunities for individual investments that make up a mutual fund. Investing in a managed portfolio saves you time because you don’t have to research each investment individually.
“With mutual funds, you have a team of analysts researching the various companies and bonds that make up a mutual fund. They even travel the globe to meet with these companies to get an overall insight into a company’s long-term vision,” says MacRae.
Mutual funds also provide a broad diversification for a relatively small investment. Diversification is important as it can reduce volatility and risk. While world events may impact some of the holdings in your mutual fund, others may thrive and make up for those performing poorly.
When you purchase a Guaranteed Investment Certificate or GIC, you are guaranteed an interest rate for the time your money is locked in the GIC. Lock in your money for a longer period, and you’ll earn a higher interest rate. So regardless of the length of your GIC, you’ll always know exactly how much interest you’ll earn.
Mutual funds don’t give you that same guarantee. The rate of return depends on how well the holdings that make up the mutual fund perform. While the past performance of a mutual will not guarantee how it will perform in future, it is important to maintain a long-term commitment when holding investments such as mutual funds.
A good rule of thumb for investments is that the higher the potential return, the higher the potential risk. For MacRae, it comes down to education.
“At Cambrian, we want to improve financial literacy and help our members understand what they own and why they own it,” explains MacRae. “There’s always noise in the media about the risks involved with investing in financial markets. We need to work through that noise to help our members understand how financial market-based investments still make sense for them depending on their time horizon.”
While there are no guarantees on rates of return with mutual funds, they are nevertheless an attractive option for long-term investors. Professional money management, diversification and the guidance and advice of Cambrian’s Credential Asset Management and Credential Securities advisors not only keep potential risks at bay but make for an enticing combination to reach your retirement goals sooner.
“If someone goes on Cambrian’s webpage and uses our Retirement Assessment Calculator, they can identify whether or not their retirement plan is on track,” says MacRae. Mutual funds are a good option for people who can ride out the ups and downs. If you don’t need the money immediately, a mutual fund can help you plan for retirement.
Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.
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