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Gail Bebee is a Personal Finance Author and Speaker.

Tory Zimmerman/The Globe and Mail

Gail Bebee is the author of No Hype - The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com. This is part three of a 12-part series for people that are new to investing on their own.

Virtually all direct investors encounter mutual funds on their journey to investing on their own.

Burned by the high costs and poor returns of funds they've owned, many are ready to sign up for Mutual Funds Anonymous (MFA). Despite some past fund disasters, I have not sworn off mutual funds. It's my belief that the judicious use of these manufactured investments can add value to the portfolios of most direct investors.

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Almost everyone will hold some cash in their investment account at some point in time. Money market and T-bill mutual funds are a convenient place to park this cash short term until you decide what to buy. (See Part I of this series for specific examples of such funds.)

Mutual funds are a definite option if you want a low maintenance portfolio. One of the all-in-one funds discussed in Part II is the simplest case. For a portfolio more tailored to your personal goals and with a few extra clicks of the buy button, you could invest in one of the model mutual fund portfolios offered by some discount brokers.

BMO InvestorLine offers seven Heavy Hitter Select Model Portfolios matched to various risk profiles. With a minimum of $15,000, you could invest in one of 16 RBC Direct Investing model mutual fund portfolios. The balanced risk version, for instance, is composed of 11 funds with exposure to cash equivalents, fixed income and Canadian, U.S. and international equities. Besides convenience, model portfolios are a good way for those without large amounts of money to achieve a diversified, professionally constructed portfolio.

If you save and invest regularly, mutual funds offer a convenient and cost-effective way to invest small sums of money. For example, TD Waterhouse Systematic Investment Plan allows you to buy a fixed dollar amount of the fund or funds of your choice each month, using money automatically transferred from your bank account. On the flip side, for people such as retirees who need to withdraw funds regularly, discount brokers offer plans such as TD's Systematic Withdrawal Plan which lets you automatically redeem a pre-arranged amount of your mutual fund holdings each month.



New to direct investing? The series

More from Gail Bebee:



Some mutual fund managers have access to investments that the average person could never buy. Others can ferret out winners due to their specialized expertise and ample resources to investigate good prospects. It can make sense to buy such funds and hire the fund manager as a specialist financial adviser. A few examples will illustrate the point.

Buying the Chou Associates Fund means you hire renowned value investor Frances Chou to source global small cap and mid-cap stocks for your portfolio. If you want to invest in the high risk-high reward world of high-yield international debt, buying the RBC Global High Yield-A Fund will give you access to a diversified collection of debt you could never find on your own.

Well-known gold bug John Embry has a great track record picking gold stocks. You can hire his expertise by buying the Sprott Gold and Precious Minerals Fund .

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A final, lesser known reason to invest via mutual funds: investing in American companies through Canadian mutual funds allows those Canadians subject to the U.S. government's estate tax on their worldwide assets to avoid the tax.



Our Online Investing series:

  • Rise of the kitchen table traders
  • Stop-loss is designed to save your skin
  • Five tips for managing your investments
  • The rapid rise of an indie brokerage
  • Only a group effort can prevent investor fraud
  • Like investing, teaching it is best done early, often
  • Park your cash here while you learn the ropes




If you decide that there's a place for mutual funds in your life, do spend some time and effort to select the fund or funds which best meet your needs and goals. The attached chart is a brief guide to the selection process. Pay particular attention to the management expense ratio (MER), the fee investors pay the fund manager to operate the fund. Canadian funds have some of the highest management expenses in the world, but smart investors can find decent lower-cost funds.

Like every other investment, there are pluses and minuses to owning mutual funds. Direct investing offers you the opportunity to buy mutual funds where they add value to your portfolio. Savvy investors will profit from such opportunities.

Mutual Fund Selection Guide

Start your search with one of the mutual fund screening tools available at discount broker and financial websites such as Globefund or Morningstar. Use some or all of the following criteria to generate a short list of funds of interest:

  • Asset class that fits your investment objectives
  • Reasonable management expense ratio (MER), reported as a percentage of the assets in the fund. Look for MERs of 2 per cent or less for growth and 1.0 per cent or less for income classes.
  • Rated in the top two categories of the website's ranking system
  • Consistent upper quartile performance compared to similar funds

Next get acquainted with the short-listed funds. This includes a visit to the fund company's website. Confirm or check if:

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  • The fund objectives meet your needs
  • The funds operating expenses (MER and trading fees) are reasonable There are no sales charges applied by the fund company if you purchase the fund from a discount broker
  • The actual fund holdings are consistent with the fund's objectives
  • The fund has at least a 3-year performance history
  • The fund management is experienced and puts their own money in the fund
  • The fund size is not detrimental to the fund's mandate e.g. a small company fund that is too big may not be able to find enough good companies to buy
  • The fund has any special policies are not detrimental to your profits e.g. broker processing fees or fund company early redemption fees

Finally, other things being equal, choose the fund with the lowest MER.

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