What is a mutual fund?

A mutual fund is a pool of money that is invested by a professional investment manager on behalf of a large group of people. The profits and losses made from the investments are shared by the whole group.

What do mutual funds invest in?

There are mutual funds available for almost any investment, from government and corporate bonds, to mining companies, to real estate, to foreign companies. Some mutual funds are designed to provide a regular income, others for long-term growth and yet others for a balance between these goals. Though there are thousands of different investments available, they generally fit into three basic categories.

1. Equity securities, or stocks, are shares in a company.
2. Fixed income securities, including bonds, are the obligations of a company or a government to repay a sum of money, usually with interest.
3. Cash and cash equivalents are short-term investments. Investors generally put their money in cash when they may need to get it quickly or when they’re waiting for the investment situation to become clearer.

How do I make money?

Investors can earn money from securities in two ways.

1. The value of your units will fluctuate based on the changing value of the investments held in the fund. If you sell your units at a price higher than when you bought them, you will make money.
2. Fixed income securities pay interest and some equity securities pay dividends, which are a portion of any profits the company may earn. Some mutual funds pay these out as profits (a “distribution”) on a regular basis. Or the profits may be reinvested in the fund, giving you additional units.

Why should I invest in mutual funds?

Professional management: Experts make all the investment decisions. Since it is their full-time job and they have access to information and research unavailable to individual investors, they are likely to make better choices.

1. Diversification: Mutual funds allow you to spread your money around since they typically hold many investments. This is a sound way to defend against the ups and downs of the markets. It also gives you access to investments you wouldn’t be able to buy on your own.
2. Easy access to your money: You can sell your units at almost any time to get money when you need it. (You may get less than you invested, however, depending what the markets are doing.)
3. Record keeping: Mutual fund companies send you regular financial reports, tax slips and statements that help you keep track of your investments.

How do I buy a mutual fund?

First you have to decide what kind of investments you want and how much money you want to invest (both initially and on a regular basis).  You can buy funds from any registered dealer. Since many financial advisors are also registered dealers, or have access to a registered dealer, they can help you make your investment decisions, then purchase the appropriate funds for you.

What does it cost me?

When you buy a fund, the person who sells it to you charges a commission, also known as a sales charge or load. You can choose between two kinds of sales charges. Both are a percentage of your original purchase amount.

1. An initial sales charge (ISC) is paid when you buy your mutual fund units.
2. A deferred sales charge (DSC) is paid only when you sell your units, and the percentage generally declines the longer you hold your investment. If you hold your mutual fund for a certain length of time, this charge can go to zero.

The cost of managing a fund, known as the management expense ratio or MER, includes management fees, brokerage commissions, audit and legal costs, and other operating expenses.

*courtesy of Fidelity Investments