What is a mutual fund in simple terms
A mutual fund pools money from multiple investors to buy a mix of stocks, bonds, or other assets. A professional fund manager handles the investments, aiming to grow the fund. You, as the investor, earn returns through dividends, interest, or capital gains, but fees and management costs can impact overall returns.
Types of mutual funds
| - | Description | Best for |
|---|---|---|
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Money market funds invest in short-term, low-risk securities like treasury bills and commercial paper. They offer stability, liquidity, and modest returns, making them a safe place to park cash. |
Conservative investors seeking capital preservation, easy access to funds, and a low-risk alternative to savings accounts.
Low return, low risk |
|
Fixed income funds invest in government and corporate bonds, aiming to provide steady interest income while preserving capital. They tend to be less volatile than stocks but can still fluctuate with interest rates. |
Investors looking for stable income, lower risk than stocks, and a balanced approach to wealth preservation.
Low-to-average return, low-to-average risk |
|
Balanced funds hold a mix of stocks, bonds, and sometimes cash, offering a blend of growth and stability. They adjust allocations based on market conditions to reduce risk while capturing returns. |
Moderate investors who want diversification, steady growth, and lower volatility than pure equity funds.
Average-to-high return, average-to-high-risk |
|
Equity funds invest primarily in stocks, offering high growth potential but also greater risk. They can focus on specific industries, regions, or market sizes, depending on the fund’s strategy. |
Growth-oriented investors willing to accept market volatility in exchange for long-term capital appreciation.
High risk, high return |
Related read: How to invest in mutual funds?
How do mutual funds work?
- Mutual funds make money in three ways: dividends (from stocks), interest (from bonds), and capital gains (when investments grow in value).
- The money you earn can be reinvested (to buy more units) or paid out to you.
- You can buy and sell mutual fund units based on their daily price, called the Net Asset Value (NAV).
- A fund manager picks and adjusts investments to try to make the fund grow.
- You can invest in mutual funds through banks, financial advisors, or online platforms.
Related read: Active vs passive investing | Why passive is winning out in the long run
Buy mutual funds from some of Money.ca's favourite brokers
| CIBC Investor's Edge | TD Direct Investing | TD Easy Trade |
|---|---|---|
|
|
|
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◦ Low trading fees for self-directed investors
◦ Wide selection of mutual funds and ETFs ◦ Research tools to compare fund performance |
◦ Access to TD Mutual Funds and third-party funds
◦ Advanced research tools for better decision-making ◦ Seamless integration with TD banking and investing |
◦ No commission fees on TD ETFs and mutual funds
◦ User-friendly mobile app for easy investing ◦ Pre-built portfolios for hands-off investors |
| CIBC Investor's Edge review | TD Direct Investing review | TD Easy Trade review |
| Visit CIBC Investor's Edge | Visit TD Direct Investing | Visit TD Easy Trade |
Mutual fund options in Canada – A cost comparison
| Bank | Lowest cost mutual funds |
|---|---|
| TD Mutual Funds |
TD Canadian Index Fund-I: MER of 0.88%
TD Canadian Bond Index Fund-I: MER of 0.83% |
| BMO Mutual Fund |
BMO Canadian Index Fund: MER of 1.05%
BMO Core Bond Fund: MER of 0.95% |
| RBC Mutual Fund |
RBC Canadian Index Fund: MER of 0.72%
RBC Canadian Government Bond Index Fund: MER of 0.67% |
| CIBC Mutual Funds |
CIBC Canadian Index Fund: MER of 1.14%
CIBC Canadian Bond Index Fund: MER of 1.17% |
| Scotiabank Mutual Fund |
Scotia Canadian Index Fund: MER of 0.98%
Scotia Canadian Bond Index Fund: MER of 0.86% |
The costs of mutual funds – are they worth it?
Mutual funds come with steep fees—Management Expense Ratios (MERs) of 1%-3%, plus sales charges and trailing commissions. These costs cut into your returns, making long-term growth harder. Worse, most actively managed funds fail to beat the market after fees. ETFs are the smarter choice—lower fees, better performance, and more control over your money.
ETF vs mutual fund – Which one is better?
- ETFs generally have lower MERs (often under 0.5%) compared to mutual funds.
- ETFs trade like stocks, offering more flexibility than mutual funds.
- Mutual funds are actively managed, but most fail to beat the market over time.
- Many Canadians are switching to ETFs for better long-term returns.
- Robo-advisors offer a hybrid approach, using ETFs with automated investing strategies
Related read: ETF vs mutual fund
Should you invest in mutual funds?
- Mutual funds may be suitable for hands-off investors who prefer bank-managed portfolios.
- High fees and underperformance make them less attractive than ETFs.
- If you're looking for a low-cost, high-return alternative, ETFs or robo-advisors are better options.
- Consider switching to an ETF-based portfolio to reduce fees and maximize growth.
- Explore investment platforms like Wealthsimple, Questrade, or TD Easy Trade to start investing in ETFs.
Related read: Best robo advisors
Why do so many Canadians turn to mutual funds?
When your goal is to invest in a variety of assets, like stocks and bonds, choosing the individual vehicles to put your money behind can involve more work — and risk — than some investors are comfortable with.
Canadians have nearly $2 trillion worth of capital invested in mutual funds, skyrocketing since the ‘90s, according to the Investment Funds Institute of Canada.
Why are mutual funds so popular? There are several reasons. They’re relatively easy to buy, inherently diverse and, as you’ll soon see, easy to understand.
Spread your money around — in one place
Mutual funds collect capital from investors that they use to purchase a combination of stocks, bonds and other securities that they expect will generate the strongest returns. The funds, run by portfolio managers who choose assets to buy and sell, are often categorized according to risk tolerance and investor objectives, like growth or fixed income.
A large Canadian bank, for example, might offer several mutual funds, each one targeting a different kind of investor. One might be weighted heavily in bonds, with minimal exposure to the stock market, as a means of tamping down risk. Another might be brimming with growth stocks that have the potential for impressive short-term returns in exchange for taking on greater risk.
You purchase shares in a mutual fund as you would with stocks or an exchange-traded fund, but unlike those assets, which trade on public markets like the Toronto Stock Exchange, you can only purchase mutual fund shares directly from the fund or through a broker, although “broker” can also refer to robo-advisors.
A mutual fund’s share prices are determined by dividing the value of the securities it holds by the number of shares outstanding. The share price fluctuates as the value of the securities in the fund are reassessed at the end of each business day.
How you make money from a mutual fund
Mutual funds can provide multiple income streams, but your returns will primarily take the form of distributions.
Those are payments to investors based on the income a fund receives over the course of a year. The size of your distribution will depend on how many shares you owned at a specific time, known as the “record date.” How often a fund pays its distribution varies.
You can receive your distribution in cash or reinvest it into the mutual fund. Regardless of what you choose to do with your profits, expect to pay taxes on them.
That’s not the only time your mutual fund will generate costs. Because these funds require management by highly skilled, highly compensated experts, the associated fees can be quite high, as can the commissions, which are referred to more benignly as “loads.”
Even with the costs involved, mutual funds remain a favourite investment. And with good reason: They’re a reliable way to add diversification to your portfolio without the risk of picking individual stocks or bonds.
FAQ
Tyler Wade has worked in personal finance for over 5 years writing for brands like Ratehub, Forbes, KOHO, and now Money.ca.
Clayton Jarvis is a mortgage reporter at Money.ca. Prior to joining the Money.ca team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.
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