Mutual Fund

How a mutual fund works

When you invest in a mutual fund, your money is pooled with other investors' money in the fund. You receive units, or shares, in the fund in exchange for the money you invest.

About the company

The fund uses the money received from investors to buy investments, which are held in trust on behalf of the investors by a custodian. The custodian must be either a Canadian chartered bank or a large trust company.
Each mutual fund is managed by a professional manager. The fund manager invests the money in a variety of investments, and charges the fund a fee for providing this service.
Different kinds of mutual funds
Mutual funds are classified according to the type of investments they hold. For example: equity funds hold shares of companies listed on recognized stock exchanges,

Mutual funds are long term investments

Many factors influence the value of your mutual fund investment – for instance, changes in the economy, the stock markets, interest rates, the rate of inflation and the value of the Canadian dollar relative to other currencies.
Fluctuations in the value and rate of return of your mutual fund investment are known as volatility.
A mutual fund with high volatility will have more dramatic and frequent changes in value than a mutual fund with low volatility.
All mutual funds have some degree of volatility, some have more than others. Because of this, when you invest in a mutual fund you should generally be prepared to invest for the longer term, holding the fund for five years or more.
You invest in mutual funds in the hope that they will increase in value. Taking a long-term investment approach will allow you to ride out the inevitable market corrections which may effect the value of your mutual fund investment

How a mutual fund investment can grow

You may make money on a mutual fund investment in one or both of these ways:
• The investments owned by the mutual fund may earn dividends, interest or capital gains. These earnings may either be paid out to you in cash or be invested in the fund, buying you more units in the fund.
• The mutual fund's unit value may increase. This occurs when the total market value of the fund's investments increases relative to the number of units in the fund. However, you should be aware that the unit value may decrease. If that happens, you may lose money if you sell your investment when the unit price is lower than what you paid for the units. You will realize, or trigger, gains or losses only when you sell units. As long as you continue to hold your units, the value of those units will fluctuate, depending on the value of the fund's holdings and overall market conditions.