Area of Law: Investments and Securities
Answer # 283
Mutual fundsRegion: Ontario Answer # 283
A mutual fund is one type of professionally managed collective investment vehicle. Mutual funds raise money by selling its shares or units to individual investors. The fund then uses this pool of money to purchase a variety of investments. Sometimes mutual funds are referred to as investment companies. Mutual funds are regulated by the securities industry. In most cases, shares in the mutual fund can be bought or sold at any time.
Types of mutual funds
The types of funds and what they invest in include:
- Money market – Short-term fixed income securities like treasury bills
- Fixed income – Fixed income securities like government bonds and corporate bonds
- Growth or equity – Equities like stocks or income trust units
- Balanced – A mix of equities and fixed income securities
- Global – Foreign equities or fixed income securities
- Specialty – Equities or fixed income securities in a specific region (for example, Asia) or sector (for example, information technology), and
- Index – Equities or fixed income securities chosen to mimic a specific index, such as the S&P/TSX Composite Index
Advantages of mutual funds
As an investment, mutual funds offer three main advantages.
1. Professional management
First, mutual funds provide an affordable way for individual investors to benefit from professional investment management, because the cost of managing the fund is shared amongst all the investors.
2. Easy way to diversity investment
Second, mutual funds are an easy and low-cost way for individual investors to diversify their investment portfolio. All investments come with some risk, but by purchasing several investments and diversifying your investment portfolio, you can lower your overall investment risk. For individual investors to diversify on their own can be expensive. But because mutual funds represent ownership in a wide variety of investments, buying shares in a mutual fund will help an investor diversify their investment portfolio and minimize their overall investment risk at a relatively low cost.
Third, most mutual funds are very liquid investments. It is fairly easy for investors to buy or sell mutual fund units. There are a wide variety of mutual funds available.
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