The Question:
I'm at the starting stage of saving. I've decided to take the "pay-myself-first" route and automatically put $100 bi-weekly into a TFSA mutual fund with TD Bank. Is that a good way to start? I eventually see myself getting into direct investing once I'm more comfortable. I just wanted your opinion on the $100 bi-weekly into a mutual fund that I don't plan on touching for five years.
The Answer:
I think it's a fabulous idea. Many people lack the discipline to voluntarily set aside cash for savings, so making the process automatic is a smart move. I also like the fact that you are choosing to save and invest inside a tax-free savings account. This means your money will grow tax-free and -- if you need to sell a portion of the mutual fund and withdraw the cash for an emergency or other purpose -- you can do so without tax consequences. What's more, the value of the withdrawal will be added back to your TFSA contribution room as of Jan. 1 of the year following the withdrawal -- something that doesn't happen with a registered retirement savings plan.
My one caution would be to check the management expense ratio of the mutual fund before you invest. If the bank is pushing a particular fund, chances are it has a high MER of say, 1.5 per cent or more. High MERs can exert a drag on returns. You might wish to investigate index mutual funds such as TD's e-series, which have some of the lowest MERs in the business. The TD Canadian Index Fund e-series, for instance, has an MER of just 0.33 per cent -- a real bargain.
For more answers to investor questions, see John Heinzl's Investor Clinic column. Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
John Heinzl