Mutual funds 101: The top 6 questions you should ask before buying a mutual fund.
You wouldn’t buy a computer or take your family on an excursion during summer break without doing at least a little bit of research first.
Investing for your future goals is worth the same amount of effort.
That’s why you should find out as much as you can about a mutual fund—before you purchase it.
Start by researching the disclosure documents that a mutual fund company is required to file (by law) with securities regulators.
You can start by researching the disclosure documents that a mutual fund company is required to file (by law) with securities regulators. You can find these documents on the mutual fund company’s website, the System for Electronic Document Analysis and Retrieval (SEDAR)—or save yourself the time and simply ask your financial advisor. Because between grading papers and working on lesson plans, the last thing you probably feel like doing is more research or paperwork.
Did you know the vast majority of investors trust their advisor to give them sound advice (95%) and 88% agree that they get a better return on their investment than they would without an advisor?*
Beyond researching disclosure documents, a good guideline to follow before purchasing mutual funds is to make sure that you ask the following 6 questions:
1. What is the fund’s goal?
Does it fit the objectives of your portfolio? How long do you have to invest (I.e. what’s your timeline)? What are your personal goals? Does it provide regular income? Does it work with your other investments? These are all important factors your chosen mutual fund(s) should align with to ensure you feel confident about making the right investment decision.
2. How risky is it?
“You can make or lose money on a mutual fund,” says Shannon Lamont, Certified Financial Planner professional at Educators Financial Group. “Usually, the higher the potential returns, the higher the risk.” One of the key roles of a financial advisor is to ensure clients are invested correctly based on their risk tolerance. According to Polara, 76% of investors said they had a risk tolerance conversation with their advisor in the past year. Discuss the fund’s level of risk with your financial advisor and whether it’s suitable for you.
3. How did it perform in the past?
Knowing how a fund has performed in the past can’t tell you how the fund will perform in the future, but it can tell you how the fund compares to other funds with the same investment objective.
Ideally, you should review a fund’s performance for more than one year and how it performed in different market conditions.
We know what you’re thinking—you still need to review a pile of tests and essays. What educator has the time to review an entire year of fund performance? That’s where enlisting the advice of professionals dedicated to understanding investments can save you the time and hassle of conducting that research yourself.
4. What are its costs?
All funds must disclose their fees and expenses in their Fund Facts document and Simplified Prospectus. Karen Hubbard, Regional Vice-President, Client Advisory Services, Educators Financial Group, recommends, that you “look at the Management Expense Ratio (MER) charges. Also find out how much you’ll pay when you buy or sell units and take into consideration the level of service and advice that you will receive.” Comparing the fund’s costs and performance against those of similar funds will shed light as to the kind of value you’re getting for your money.
5. Who manages the fund?
The portfolio manager is key to the success of a mutual fund. So it makes sense to know this person’s education and experience. Also don’t be shy about asking them questions. Do they run other funds? How successful have they been? What is their investment style? Has the fund’s management changed a lot over the years? High turnover can be a warning sign.
6. How will I be taxed?
If you don’t hold the fund in a registered plan, do you know what types of distributions are usually made and how they’re taxed? Do you know how capital gains (or losses) are taxed? Knowing upfront about how much you’ll have to pay in tax will prevent any surprises down the road.
At the end of the day, remember that there’s no such thing as a bad question.
Because when it comes to investing in mutual funds, you don’t want to be left with second guesses. Instead, reach out to Educators Financial Group. We’re here to ensure you have the information and advice you need to succeed when it comes to your investment goals.