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What is a mutual fund?

A mutual fund is a type of professionally managed collective investment vehicle. Mutual funds are able to raise money by selling its shares or units to individual investors. This pool of money is then used by the mutual fund to purchase a variety of investments. Mutual funds are sometimes referred to as investment companies. The securities industry regulates mutual funds. Usually, mutual fund shares can be bought or sold at any time.

Different tpes of mutual funds

The different types of mutual funds and what they invest include:

  • Money market: Short-term fixed income securities such as treasury bills
  • Fixed income: Fixed income securities such as government bonds and corporate bonds
  • Growth or equity:  Equities like stocks or income trust units
  • Balanced: A mix of equities and fixed income securities
  • Global: Foreign equities or fixed income securities
  • Specialty: Equities or fixed income securities in a specific region like Asia, or sector like information technology, and
  • Index: Equities or fixed income securities chosen to mimic a specific index like the S&P/TSX Composite Index

Advantages of mutual Funds

Mutual funds are an investment that offers three main advantages:

1. Professional management: mutual funds provide individual investors with an affordable way to benefit from professional investment management by splitting the cost of managing the fund among all the investors.

2. Easy to diversify investment: mutual funds are an easy and cost-effective way for individual investors to diversity their investment portfolio. Even though all investments have inherent risk, you can lower your overall risk by diversifying your investment portfolio through the purchase of several investments. As an individual investor, diversifying your portfolio can be extremely expensive. But since mutual funds represent ownership in a wide variety and number of investments, buying shares in a mutual fund will assist the investor in diversifying their investment portfolio. Additionally, it will also help the investor minimize their overall investment risk at a fairly low cost.

3. Liquidity: mutual funds are usually very liquid investments. As such, it is pretty easy for investors to buy or sell their mutual fund units. There are many different mutual funds available. If you require further information, you can contact an Investment Advisor for more details about what mutual funds are available. An Investment advisor will be able to help you determine which mutual funds are best suited to meet your investment objectives.

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Ontario Securities Commission