Types of Mutual Funds

The growing popularity of Canadian mutual funds has resulted in an increase in both the number and type of mutual funds available, ranging from the more conservative, such as most money market funds, to the more aggressive, such as most growth/equity funds.

The large number of Canadian mutual funds available to today's investor provides them with more investment choices than ever before. While choice may be a good thing, it can sometimes be daunting. A CIBC Wood Gundy Investment Advisor can assist you in choosing a mutual fund investment that will best meet your financial goals.

Below is a description of some of the different types of mutual funds available in today's Canadian marketplace:

Money Market Mutual Funds

Money market mutual funds invest in short-term, interest-bearing instruments, such as Treasury Bills, thus providing a steady, secure source of interest income. Money market mutual funds make an ideal investment alternative to bank accounts or term deposits.

Money market mutual funds may concentrate on domestic markets or diversify into foreign money markets. Foreign money market mutual funds also provide investors with the potential of currency appreciation. Investors usually purchase money market mutual funds at a fixed net asset value, usually at $10 a unit. Performance is measured on the average annual yield rather than compound rates of return.

With money market mutual funds, income is credited daily and paid monthly at rates that are competitive with other short-term investments.

Fixed Income Mutual Funds

Fixed income mutual funds concentrate on generating current income. Most fixed income mutual funds invest in high-quality bonds issued by governments, provinces and corporations - either domestic or foreign.

There are two main types of fixed income mutual funds - those that invest in long-term bonds to provide investors with regular income, and those that actively trade the bond portfolio to provide a high total return that combines interest and capital gains.

While fixed income mutual funds are among the most secure investments, they do experience price fluctuations in response to interest rate movements. Interest income is paid either monthly or quarterly, and capital gains are paid annually.

Dividend Mutual Funds

Dividend mutual funds invest in high-yielding, dividend-paying preferred and common shares. These funds are attractive to investors who seek a steady stream of income and who want to take advantage of the dividend tax credit to increase their after-tax return. Dividend mutual funds have minimal capital gains potential.

Growth/Equity Mutual Funds

Equity mutual funds, often called growth funds, provide investors with a good hedge against inflation. Equity mutual funds invest mainly in common stocks. The primary investment objective is growth of capital, but the investment style often differs from fund to fund.

Mutual funds with a conservative, long-term growth strategy invest primarily in established, "blue chip" companies. A fund with a more aggressive strategy might focus on smaller capitalized companies or junior companies expected to grow quickly. Some equity mutual funds combine both strategies.

There are also equity mutual funds that specialize in a particular industry sector, geographic region or country. Investors who wish to invest in a particular country are able to purchase a mutual fund that focuses primarily on that country. For investors who want broader diversification outside Canada, mutual funds that focus on global markets or a specific region (such as the Far East or Europe) may be more attractive.

Balanced Mutual Funds

Balanced mutual funds usually invest in a combination of equities, bonds and short-term money-market instruments. Balanced mutual funds are an ideal type of fund for investors who want long-term capital growth combined with the security of interest income.

As opportunities arise or conditions change, balanced mutual fund managers adjust the weighting of assets in the mutual fund to help maximize performance.

Index Funds

These mutual funds generally mirror the performance of a particular index, such as the NASDAQ, TSX, or S&P. These are generally considered to be "passively managed" funds, because there is no active selection of the securities held within the fund. Because of the low volume of trading activity, and the lack of active securities analysis and selection, the management expense ratios (MERs) of index funds are generally lower than other funds.

Labour-Sponsored Investment Funds

Labour-Sponsored Investment Funds (LSIFs) may also be known as Labour-Sponsored Venture Capital Corporations (LSVCCs). They typically invest in small, private firms that are not listed on the public markets. LSIFs may also be eligible for tax credits. Investments in LSIFs are not suitable for all investors - LSIFs are considered to be relatively high-risk investments, and must be held for a minimum of eight years to avoid repaying the tax credits. For more information on LSIFs, please contact your CIBC Wood Gundy Investment Advisor.

Closed End Mutual Funds

In addition to open-end mutual funds, there are also closed-end mutual funds which invest in a portfolio of securities but have only a fixed number of shares (or units) available for purchase.

The shares of closed-end funds are bought and sold on the various stock exchanges. The market value of closed-end shares is not directly tied to the value of the underlying assets in the mutual fund portfolio, as is the case with open-ended funds.

For example, the market value of a share of a closed-end fund may trade on an exchange at $12.00, whereas the underlying value of the assets may be $16.00 per share.

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