Mutual funds
What is a mutual fund?
A mutual fund is a pool of investments that sells its securities (units, in most cases, or shares, if set up as a company), to investors who have a common objective. Managed by professional portfolio managers, mutual funds allow you to diversify 
your portfolio by investing in a number of different investments. Mutual funds can invest in equities , bonds , or commodities , and may specialize by industry, sector, or country. You can generally find a copy of the fund's prospectus on the fund company's website.
You should also ask about Fund Facts, a document that highlights key information for investors, including a description of the fund, as well as the performance, risks and costs of buying and owning the fund. It should be available on the fund company’s website, or you can request it from the person who sells you the mutual fund.
What risks do they have?
Mutual funds are low to very high-risk investments.
Each mutual fund has a different level of risk depending on the fund manager’s investment strategy and skill, and what products and companies the fund invests. Unlike segregated funds, mutual funds do not offer maturity guarantees. There are risks common to any mutual fund, such as the risk that you will lose money due to the management fees charged to the fund. Once you take into account management fees, mutual funds often do not outperform the market.
Every type of fund has a different risk. This chart shows the risk of a variety of mutual funds.
| Type | Risk level | Risk source |
| Money market funds | Low | Money market funds invest in short-term guaranteed investments such as government bonds and T-Bills . These funds are a good place to keep money that you need to access right away. Pay attention to the management expense ratio (MER) , of the fund. If interest rates are low, much of the interest from the fund’s investments goes to paying management fees even if the MER is low. While there is low risk that you will lose money if your MER is low, you can also expect low potential returns. There is risk you will not stay ahead of inflation. |
| Bond funds | Low to medium | Unlike individual bonds, bond or fixed income funds don’t have a maturity date, so there is no certainty of getting your principal back. If interest rates are low, much of the interest from the bonds goes to paying management fees. |
| Equity mutual funds | Medium to high | Varies from fund to fund. The risks of an equity fund are like the risks of stocks , with the benefit of diversifying between numerous stocks. |
| Country or sector specific funds | High | These funds are less diversified than other funds and this makes them risky investments. A foreign fund also has foreign currency risk, where you could lose money if the exchange rates change. |
Funds with a history of inconsistent returns tend to be riskier investments than those that perform consistently year after year.
One way to reduce risk is by dollar-cost averaging . For example, investing $100 per month rather than $1000 all at once balances out price fluctuations. This allows you to buy more when the price is lower, and fewer units when the price is higher.
Can you sell them easily?
Yes. Mutual funds are popular and highly liquid. Mutual fund companies are generally required to buy / redeem units at a fund’s Net Asset Value (NAV) at the end of each trading day.
If you invest in mutual funds, do so for the long term. If you sell a fund, soon after buying it you may be subject to an additional fee called a short-term trading fee .
What are the costs?
Mutual funds can have high associated costs because a fund manager usually actively manages the fund. Your advisor may also receive a commission for selling it to you. As with any investment fund there are sales charges, an MER, and possible trailer fees . See Fees for an in-depth discussion of all the fees.
What are the expected types of returns?
Mutual funds usually pay:
Mutual funds may pay a regular distribution. If so, you should ask how much of this distribution comes from interest or dividends the fund earns, and how much is a return of capital .
If the fund you hold does not pay a regular distribution, you will realize your return only when you sell your units back to the fund company. At this point, you will get capital gains if the net asset value (NAV) has increased, or capital losses, if the NAV has decreased.
Mutual funds often do not outperform indices once you take into account their management fees. Mutual funds must hold a portion of their portfolio in cash to fund redemptions. This means they will never invest 100% of the money you invest. This can reduce their returns.