A mutual fund is a type of investment fund. An investment fund is a collection of investments, such as stocks, bonds and other funds. A mutual fund can focus on specific types of investments. For example, a fund may invest mainly in government bonds, stocks from large companies, or stocks from certain countries. Or, it may invest in a variety of investments.
When you buy a mutual fund, you're pooling your money along with other investors. You put money into a mutual fund by buying units or shares of the fund. As more people invest, the fund issues new units or shares.
A portfolio manager makes the decisions about how the money in the fund is invested, according to the investment objectives of the fund. They manage the fund on a day-to-day basis, deciding when to buy and sell investments.
3 things to know
Risk – All mutual funds have risk. The level of risk and return depends on what the fund invests in.
Performance – How a fund has performed in the past can’t tell you how it will perform in the future. Mutual funds are not guaranteed. You may not get back the amount of money you invest.
Fees – Fees and expenses reduce the return you get on your investment in a mutual fund.
2 ways to make money on a mutual fund
Capital gains – You have a capital gain if the value of the investments in a mutual fund goes up and you sell the fund for more than you paid for it. If you sell the fund for less than you paid for it, you will have a capital loss. The value of a fund is usually calculated at the end of every day. The term for this value is net asset value per unit (or share).
Distributions – Depending on the type of fund you buy, you may also receive distributions of dividends, interest, capital gains or other income the fund earns on its investments. You can choose to receive distributions in cash or have them reinvested in the fund for you.
Fees and expenses reduce the return you get on your investment. Some of these fees are paid by you, and others are paid by the fund. Understand the costs before you buy a mutual fund.
How mutual funds are taxed
If you hold your mutual funds in a non-registered account, any money you make on them is subject to tax. Distributions are taxable in the year you receive them, whether you get them in cash or they are reinvested for you. Interest, dividends and capital gains are all treated differently for tax purposes, and that will affect your return from an investment.
If you hold your mutual funds in a registered plan, like an RRSP, a RRIF or an RESP, you won't pay tax on the money you make as long as that money stays in the plan. When money is withdrawn from the plan, it will be taxed as income.
With a TFSA, you don’t pay any tax on the money you make while it’s in the plan – or when you take it out.
Learn more about how tax affects your investments.
Where to buy mutual funds
Banks and trust companies
Life insurance companies
Credit unions and caisses populaires
Mutual fund dealers
Mutual fund companies that sell directly to the public.
Most mutual funds are sold through financial advisers who are required to be registered with their provincial regulator (for example, the Ontario Securities Commission). They must also work for a company that is registered to sell funds. You can buy mutual funds without an adviser if you use a discount brokerage.
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