WTF Even Is A Mutual Fund? We Asked A Local Expert

Is it the right investment for you?

Contributing Writer
Person walking down a pedestrianized avenue du Mont-Royal in the summer of 2020.

Person walking down a pedestrianized avenue du Mont-Royal in the summer of 2020.

We all know we should be investing for the future. Whether it's in anticipation of kids, travel, buying a home or retirement, making investments is a way to actually work towards our short and long-term goals. There are tons of ways to start investing, one of the most common being mutual funds.

WTF is a mutual fund?

According to Ryan Evans, a financial planner with BMO, "they are investment portfolios that give investors easy access to a broad range of investments that are professionally managed and offer investment diversification."

So what does this mean? Basically, a mutual fund is a carefully-crafted collection of investments that get managed by a licensed professional. They offer diversification in your investments, meaning that the performance of the portfolio isn't dependent on the performance of one or two investments.

"Essentially mutual funds are a collection of other investors' money," said Evans. "They create a portfolio. These portfolios can consist of various investment types such as stocks, bonds, exchange-traded funds (ETFs) cash, and other investment types. Depending on the mutual fund's goals and objectives, there is a fund manager behind the scenes and that fund manager will determine how those portfolios are invested."

The advantages and disadvantages of a mutual fund

The main advantage of mutual funds is how low-maintenance they are for the investor.

"You are getting into a portfolio that is professionally managed by a fund manager and their team," Evans explained. "These are people who are very hands-on in the financial markets and are looking at forecasts and projections to make adjustments to your portfolio."

The potential downside to a mutual fund is the same as any other investment — it comes with a certain level of risk.

"When comes the time to invest in mutual funds, the individual investor needs to think of what kind of risk they are ready to assume, as some investors may be willing to take on more risk than others," said Evans. "If you skip that part and you invest in something with a higher risk, you might have some results that you wouldn’t be happy with. That's why it's important to take the time to think of what kind of risk we want to take before moving ahead with an investment."

Choosing the right mutual fund

Not all mutual funds are created equal. Some present the opportunity for higher risk and higher reward, while others are more conservative and dependable. Which mutual fund you choose depends on your investment goals and your comfort with risk. That's why it's important to talk with a licensed mutual fund representative to determine which mutual fund is right for you — or if mutual funds are the right choice at all.

"Since investors are built differently, we all have different risk attitudes and feelings towards that. The most important thing is that you do need to speak with a licensed mutual fund representative to see if mutual funds are suitable for you," Evans explained.

"That representative can help you determine what your financial goals are by asking a series of questions that will determine what kind of time horizon you're at, and what your attitude is towards risk. Once the answers to these questions are determined, that will create an investor profile, and then that representative can make some recommendations."

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