What is a mutual fund?

A mutual fund brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, or units, which represent a part of these holdings. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal.

In general, new investors may contribute their investment at any time. Existing unit holders may redeem their units at any time also.

What are the advantages of mutual funds?

Diversification and Convenience

Whether you are a stock or a mutual-fund investor, it is very important to diversify. The old saying "Don't put all your eggs in one basket" still applies. Diversification reduces your risk by spreading your money across different companies, countries and types of assets. A mutual fund is lot more diversified than a stock or a bond, because a typical fund holds 20 to 50 stocks or a mixture of stocks, bonds, T-bills and so on.

Diversification can be a headache if you invest in stocks or bonds. You need to do lots of trading, and you have to keep track all of your portfolios constantly. A mutual fund gives you exposure throughout the world with diversification and convenience—nothing needed from your side.

Liquidity

Mutual funds are very easy to sell and buy. Your money is not tied up for any specified terms or years. Keep in mind that, except for money-market funds, you will incur an early redemption fee if you redeem your fund within the first 30 to 90 of purchase. Consult your mutual-fund prospectus to find out more.

Professional Management

Choosing an individual stock or bond can be an enormous task for new investors. All the research and decision-making can be daunting. Everyday investors don't have the tools or resources to make a prudent decision. When you buy mutual funds, you are buying the expertise and service of the group of professionals who manage those funds. Each group consists of a fund manager and a few analysts. This group is responsible for doing all the research and for deciding when and what to buy and sell. Basically, everything is done by the fund manager and his team. You don't have to spend days and nights analyzing stocks and monitoring your portfolio.

Dollar-Cost Averaging

Dollar-cost average simply refers to the averaging of your cost per share or per unit. Suppose you are running a monthly investment (PAC) for $100 monthly on the 15th of each month. Your mutual fund unit price will not be the same on the 15th of each month. But you will be adding the same $100 each month. If unit price goes up, you will be buying fewer units. If unit price goes down, you will be buying more units. Running a PAC year after year and calculating your average cost per share after a few years will prompt gains. Research has shown that if you do dollar-cost averaging, you end up buying more units rather than spending one set lump sum.

Dollar-cost averaging on stocks or bonds will cost you a lot of money, with transaction fees every time you buy. But you can do a dollar-cost average on mutual funds without additional cost or transaction fees. Just run a PAC, and you are good to go.

How not to become a victim of fraud:

Firstly, verify that your investment advisor is registered with the proper authorities. In Quebec, l'Authorité des Marchés Financiers is the governmental agency overseeing the investment industry. They can be reached at 514-395-0337 or http://www.lautorite.qc.ca/

Secondly, one should be wary of any advisor who uses pressure selling tactics, promises of returns which seem too good to be true.

One should also fully understand the investment being proposed.

As far as the mutual fund itself is concerned, note that a mutual-fund company does not physically hold its assets. A third party, called the custodian, holds securities on behalf of the fund company. If the fund company is in trouble, your money is protected. Fund managers can't just walk out with your money. The custodian can be either a bank or a trust company.

Fund companies need approval from unit holders to make any significant change. Also, any change in the fund's investment objective has to be approved by unit holders.

Fund companies have to disclose the fund's holdings on a regular basis. Fund companies have to disclose the fund's unit value regularly. Fund companies need to publish procedures for the purchase and sale of funds. Remember, these rules are in place to provide you some degree of safety. No investment is guaranteed, and any investment can decline in value.

Which mutual fund is best for me?

The answer is that each investor is different and no one fund is perfect for everyone. There are different factors to consider such as your age, your investment horizon and knowledge, your financial situation and objectives, your career, family and risk tolerance.

Why does my financial advisor periodically ask to review my profile?

It is an investment advisor's responsibility to ensure that your portfolio continues to best suit your investment situation. As time passes, besides getting older, other things in our lives may also change. It is our duty to make sure that those changes and your portfolio are aligned.