I remember clearly sitting in the University lecture hall as our personal finance professor provided a basic summary of mutual funds and how they came to be.
Before mutual funds were available in Canada, investors would purchase stocks and bonds through a stock broker. Most stocks at that time were sold in lots, with a minimum purchase amount. This worked fine if you had enough money to purchase a full lot. For a small investor it was hard to participate in the profits from stocks and bonds if your investible assets were too low. The effect was that people with more money had more investment opportunities than those who did not have the minimum amounts saved to invest.
Mutual funds came into the Canadian marketplace in 1932. The premise is to allow multiple investors to pool money together, thereby meeting minimums as a group and allow the opportunity to buy into a variety of stock market investments. People were then able to contribute smaller amounts, allowing them to participate in investments that may otherwise be beyond their reach.
The pool of funds is split into units with a value placed on each unit. The units of the fund rise and fall based on the values of the underlying stocks in the pool. The pool is considered ‘open ended’ so as more people invest, the fund issues new units to accommodate the investors into the pool. At any given point in time the value of the investor’s portfolio is calculated by the number of units they own multiplied by the market value per unit.
The pool of investors inside the mutual fund employ a professional investment manager to buy, sell and trade the stocks and bonds within the fund on behalf of all the owners to grow their money. The owners pay this investment manager to manage the fund as well as any associated costs of operating the fund. Today, this is referred to as the MER (Management Expense Ratio).
Over the years, the Canadian mutual fund marketplace has expanded offering an overwhelming number of options. As of March 31, 2015 there were approximately 1.22 trillion dollars in Canadian mutual funds. They have become a key part of most Canadian’s financial and investment strategies. The 2014 Canadian Investors’ Perceptions of Mutual Funds and the Mutual Fund Industry report prepared for the Investment Funds Institute of Canada by Pollara Inc., indicates that 85% of Canadians have confidence that mutual funds in their portfolio will help them achieve their financial goals.
An investor can choose from many different types of funds with different strategies, risk tolerances and mandates. Investment funds have made it both easy and affordable for even a small investor to own a variety of different investments.
There are many other variations of pooled fund now available too. Some focus on active management, or index investing, segregated funds carry additional features, corporate class and tax efficient funds. The options are many.
As with anything else, it is important for a consumer to find the right product to suit their needs. With so many choices available in the market an investor can be confident to find suitable investments to match personal goals.