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(Arpad Benedek/Arpad Benedek / iStockphoto)
(Arpad Benedek/Arpad Benedek / iStockphoto)

Investing Basics

Eight common types of mutual funds Add to ...

1. Money market funds

These funds invest in short-term fixed income securities such as government bonds and treasury bills. They are generally a safe investment, but you can’t expect your money to grow quickly.

2. Fixed income funds

These funds buy investments that pay a fixed rate of return like government and corporate bonds, and mortgages. They aim to have money coming into the fund on a regular basis, mostly through interest that the fund earns. They are usually riskier than money market funds, and the price can go up and down.

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3. Mortgage funds

These funds invest in mortgages to create income for investors. The income comes from the payments the mortgage holders make. Mortgage funds usually offer a higher level of interest income than bonds and other fixed income investments due to the default risk of mortgages. The type of mortgage varies, based on the objectives of the fund. Examples: insured or government-guaranteed first mortgages on family homes and other properties, mortgages on residential and commercial properties.

4. Growth or equity funds

These funds invest in equities like stocks and income trusts. These funds aim to grow faster than money market or fixed income funds, so there is usually a higher risk that you could lose money.

5. Balanced funds

These funds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a formula to split money among the different types of investments. They tend to have more risk than fixed income funds, but less risk than pure equity funds.

6. Index funds

These funds invest in equities or fixed income securities chosen to mimic a specific index such as the S&P/TSX Composite Index. The value of the units or shares of the fund will go up or down as the index goes up or down. Some funds may track a large number of the investments on an index, or a selection of the investments. Index funds typically have lower costs than actively managed funds because the portfolio manager doesn’t have to do as much research or make as many investment decisions.

Active vs passive management: Active management means that the portfolio manager buys and sells investments, attempting to outperform the return of the overall market. Passive management involves buying a portfolio of securities designed to track the performance of a market index.

7. Specialty funds

These funds invest in equities or fixed income securities in a specific region (for example, Asia), or a specific sector (for example, information technology). Or, they may focus on an emerging market, like eastern Europe, or a theme like socially responsible investing. These funds sometimes have very high returns. At the same time, there is a very high risk that you could lose money.

8. Real estate funds

These funds may invest directly in property or indirectly through real estate management companies or real estate income trusts (REITs). REITs invest in properties that earn income, such as shopping malls and office buildings. The risks of a real estate fund are often higher than other types of funds, as are the returns.

Before you invest, understand the fund’s investment goals and make sure you are comfortable with the level of risk. Learn more about how mutual funds work. You may also want to speak with a professional adviser to help you decide which types of funds best meet your needs.

Diversify by investment style

Portfolio managers may have different investment philosophies or use different styles of investing to meet the investment objectives of a fund. Choosing funds with different investment styles allows you to diversify beyond the type of investment. It can be another way to reduce investment risk.

3 common approaches to investing

  • Top-down approach – looks at the big economic picture, and then finds industries or countries that look like they are going to do well.

  • Bottom-up approach – looks at how well individual businesses are doing, no matter what the prospects are for their industry or the economy.

  • Socially responsible or ethical approach – invests in companies that promote things like environmental stewardship, human rights and diversity, and may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.

You can learn about a fund’s investment strategy by reading its Fund Facts document and simplified prospectus.

Mutual fund companies often build relationships with advisers and encourage them to sell their funds. When you're choosing an adviser, find out if they focus on the funds of a certain company or a specific family of funds.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca

Follow us on Twitter: @GlobeInvestor


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