Choosing the Right Investment for You: Highlight on Mutual Funds

There are many ways you can invest your money to help plan for your future, but it’s not always that simple to wade through all the options and know which one is the right investment for you. At Westoba Credit Union we’re focused on not simply selling you a product but getting to know you and your goals so that we can offer advice or even just be a sounding board in choosing the best next step in your financial plan. Keep reading as we highlight one of these investment options: mutual funds.

What is a mutual fund?

A mutual fund is an investment vehicle — in other words, a means of generating a profit off what you’ve invested in it — made up of a collection of stocks, bonds, or both. A mutual fund is professionally managed by your financial institution or advisor who will determine where your investment should be allocated in order to maximize your return. Mutual funds differ from an investment like a stock or bond because they hold a number of securities, meaning you get the advantage of diversity in your investment at a relatively low cost. Funds can vary in the amount of returns generated and degree of risk, and a financial advisor can help you determine the best option for you and your specific financial situation.

Mutual funds are organized into a variety of categories that represent the type of securities they invest in and the returns they seek. Dylan Asham, Financial and Insurance Advisor on our Financial Planning team, explains that the flexible nature of mutual funds means “there is a mutual fund for every investor, no matter your financial situation. I collaborate with my clients to find the solution that meets their needs and keeps them on track with their future goals.”

There are three classes of mutual funds:

Money Market

A money market fund is a safe, low-risk investment because they invest in short-term investment vehicles, like government treasury bills. With a money market fund, you’re not going to get a high return, but you’re also at a very low risk of losing your initial investment, or principal.

Fixed Income

These funds are a little riskier than money market funds, but with a fixed income fund, you’re likely to see a higher return on your investment. These funds invest in vehicles like mortgages, bonds, and preferred shares — those with a set rate of return. The goal of a fixed income fund is to generate income from interest and then pass that on to you.

Equity

An equity fund is the largest category of mutual fund. Equity funds invest stocks or corporate shares and differ in the size of corporation they invest in and the approach they take to their investment (or the prospect of growth of that investment). This means that there is a vast number of equity funds to choose from — those that invest in small, medium, or large companies, and those that take a value-centred approach, aggressive approach, or a blend of company size and investment approach. Equity funds do bear more risk than money market or fixed income funds, but the advantage is the exposure you get to a diversity of funds and the chance of high returns in the long term with a relatively low investment.

How do mutual funds work?

When you invest in a mutual fund, you can generate income in three ways. First is the income earned from dividends on stocks and interest on bonds. Nearly all the income generated by a fund is distributed and paid out to shareholders. Second is the chance of capital gain when a fund sells securities that have increased in price. Those capital gains are then passed along to you. Finally, if your mutual fund holdings increase in price but not sold by your fund manager, then the fund’s units increase in price, and you can then sell your mutual fund for a profit.

With a mutual fund investment, you have the choice of receiving your returns by cheque or reinvesting those returns into other mutual funds.

Is a mutual fund right for me?

There are a number of advantages to investing in mutual funds. For starters, you can rest easy knowing that your mutual fund is being managed by an expert who will do the research on the best investment for you and carefully oversee that investment, buying or selling stocks that are right for you.

You also get the advantage of a diversification of securities with a mutual fund. This means that your risk is significantly decreased compared to investing in a single security or bond.

Mutual funds are highly liquid, meaning you can buy in and sell easily. Liquidity is one of the cornerstones of financial planning, so this makes mutual fund investments smart for long-term planning.

Your investment in a mutual fund can be as low or as high as you choose, making them a cost-effective choice. As well, because mutual funds buy and sell a large number of securities at once, that makes those large-scale transactions cost less for you.

Knowing which mutual fund is right for you may seem daunting, but it’s made simple by working with our Financial Planning team. Our experienced Financial Planners are here to help streamline the process and make suggestions for you based on your goals and level of investment. Get in touch with our team today — we are happy to answer any questions you have so that you can feel confident and in control of your financial future!

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