Each mutual fund is set up to buy certain kinds of investment products that meet its goals. The fund has a registered fund manager who oversees these investments. Some funds invest in safer, lower-risk products such as treasury bills (T-bills) or commercial paper. Others are riskier and invest in things like stocks. Some funds can be quite risky.
What determines a fund's level of risk?
- The riskier the investments that the fund chooses, the riskier the fund will be. A higher risk means you may get a higher return, but there is also a greater chance of losing money.
- Some types of mutual funds, such as equity funds, fall into the riskier category. Some equity mutual funds are more risky than others. Example: Some specialty mutual funds focus on certain kinds of investments, such as emerging markets, to try to earn a higher return. These kinds of funds also face the chance of a greater drop in value.
Is my money safe if the mutual fund company goes out of business?
Like any investment in the stock market, a mutual fund is not insured or guaranteed. This is true even if the mutual fund is sold by a bank. That?s because funds are securities, not deposits. Still, there are a number of safeguards that help protect investors. For example, by law:
- A bank or trust company must hold the assets of a mutual fund.
- The distributor for a mutual fund dealer must keep separate records of all money from clients.
- Any institution that sells mutual funds must issue guarantees against the loss of assets.
Are funds from a life insurance company safer?
- Life insurance companies sell segregated funds with a guarantee you will get back most or all of your initial investment. However, the guarantee takes effect only when you die.
- The insurance company guarantees that your estate will get all or part of the money back (for example, 75%). There is an additional fee for the guarantee, and the MERs for these funds can be higher than for others.
Remember: Like any investment, there are risks when you buy mutual funds
You can control the level of risk by choosing funds that invest in safer, more stable investments. You may want to talk to a registered adviser to help you make choices that fit with your financial goals and tolerance for risk.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.