How to Invest in Mutual Funds in Canada

ETFs tend to get a lot of attention these days. Mutual funds, however, have been a Canadian portfolio cornerstone for decades. In fact, according to the Investment Funds Institute of Canada (IFIC), the amount of money Canadians invested in mutual funds skyrocketed from $100 billion to $1.71 trillion between 1990 and the end of 2019. Now, there are over 5,000 mutual funds in Canada.

And it’s no wonder Canadians are still so keen on mutual funds. Right off the bat, they offer diversification by design and professional management — two things many investors look for. And while ETFs are gaining in popularity for their benefits, as Jonathan Hartman, vice president and head of Advisor Channel Sales at RBC Global Asset Management explains, “mutual funds remain the most commonly used vehicle in Canada, especially among investors with $25,000 to $50,000 to invest.”

This guide answers some of the biggest questions investors have about mutual funds in Canada, and why they are such a popular portfolio holding for everyday Canadians.

How to invest in mutual funds in Canada

What are mutual funds?

In a nutshell, mutual funds are groups of investments within a single fund. Investors pool their money together, creating a mutual fund that is professionally managed. Each fund invests in a mix of one specific type of investment like bonds, stocks, index funds, or even other mutual funds. For example, a fixed-income mutual fund invests in securities like government bonds and corporate bonds. A balanced mutual fund invests in a mix of equities and fixed-income securities. A growth or equity fund invests in stocks or ETFs.

Interested investors buy and hold shares in the fund — usually, at a reasonably low cost. Unlike ETFs that fluctuate with the market throughout the day, mutual funds only trade once a day — after the markets close. 

“Mutual funds and ETFs make it possible for ordinary people with small amounts of capital,” explains the IFIC, “to participate in a professionally managed, diversified portfolios – something that at one time only the wealthy could access.”

A bit of trivia for you: 1932 saw Canada’s first mutual fund. By 1951, Canadian Investment Fund Ltd. had assets of $51 million.

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Mutual fund classes

When looking at a list of mutual funds in Canada, you’ll see that they all have letters at the end (eg. RBC Select Balanced Portfolio A). These letters all correspond to a series or class. These mostly relate to the minimum investment required in the fund and fee structure.

Series A: Retail investors typically buy within this series. These funds are especially attractive because of minimal requirements — typically about $500 or less). Advisors who sell these might receive a commission.

Series D: This class is geared toward DIY investors, i.e. those purchasing mutual funds through a discount brokerage. Management fees are often lower in this series since it has self-directed investors in mind, and no advice offered.

Series F: The ‘F’ here stands for fees. These mutual funds are available to investors with a fee-based arrangement with an advisor. They have generally a lower fee because the advisor is paid directly instead of through the fund, based on the negotiated rate they set with the investor (typically between 1-2%).

Series I: This series of mutual funds have high minimum investment requirements. As a result, they are aimed at institutional investors (eg. pension funds or hedge funds) or high net worth investors.

Series T: Mutual funds within the ‘T’ series are tax-efficient or tax-advantaged. These funds offer regular cash distributions every month to investors, through a fixed distribution rate (i.e. a percentage of the fund’s assets). Since this is a redistribution of capital, it’s not taxed. Given the predictable, steady monthly cash flow, this series of mutual funds is an attractive choice for those close to or in retirement. Fees and commission options are mostly the same as those in Series A.

What is the difference between ETFs and mutual funds?

As we’ve explained before, ETFs and mutual funds do share characteristics, as they are both investment funds. Some mutual funds even contain ETFs.

Instead of investing in a particular company, an ETF is essentially a basket of securities — including bonds and commodities — that trade together on the stock market. Investors can hold both ETFs and mutual funds in Canada, in registered accounts like RRSPs, RRIFs, TFSAs, and RESPs, or in non-registered accounts.

One of the biggest differences between the two is costs. ETFs tend to have lower fees and no minimums, while mutual funds are the opposite. Keep in mind, though, that the higher fees of mutual funds are because they come with a manager and their expertise. ETFs are appealing to those wanting more direct involvement with their investments.

Index fund vs mutual fund

ETFs, mutual funds, and index funds share similarities, in that they are all groups of investments. Certain ETFs and mutual funds are actually just types of index funds — which have portfolios designed to match or track a specific market index (eg. the S&P 500).

Mutual funds vs GICs

Both mutual funds and GICs (or guaranteed investment certificates) can be held in accounts like RRSPs, RRIFs, TFSAs, and/or RESPs.

GICs are, as Get Smarter About Money describes, an “investment that works like a special kind of deposit.” They are almost like a very specific type of high-interest savings account that works for short-term investment horizons (eg. a downpayment for a home within 5 years, wedding savings, etc).

When you purchase a GIC, you are agreeing to lend a financial institution a certain amount of money (typically around $500 minimum). This is for a set period of time — usually months or years. You’re guaranteed (hence the name) this deposit back when this term is up. As a result, GICs are a very safe investment vehicle. GICs pay a fixed rate of return during this set period of time — typically between 1% to 3% — at regular intervals (monthly or every 3/6/12 months). The longer the terms, the higher the interest rate.

The biggest difference between mutual funds and GICs in Canada involves risk and liquidity. First, GICs are low-risk, and you’re guaranteed to get a return. Mutual funds might give higher returns but come with more risk. Second, GICs lock in your investment. With mutual funds, it’s easier to access your money.

Are mutual funds a good investment?

Even with their sometimes-higher fees, mutual funds in Canada can absolutely be a great addition to a portfolio. Easily the biggest reason why? Their diversification.

And while yes, professional management means higher fees, many are happy having an expert at the helm of their investments. Not everyone has the time or knowledge to manage their investments.

Finally, mutual funds are a good investment because of their liquidity — i.e. you’re able to easily access your money if need be.

One of the best, most empowering actions you can take as an investor is by taking the time to research — both mutual funds specifically, and any potential investment.

Questions you should ask in your research (via The Canadian Securities Administrators) include:

  • What is the fund’s goal?
  • How risky is the fund?
  • How has the fund performed?
  • What are the fund’s costs?
  • Who manages the fund?
  • How will you be taxed?

Are mutual funds safe?

Investing always comes with a certain degree of risk. That said, mutual funds in Canada have experts at the helm. These advisors can explain potential risks, and why they are recommending certain funds. Some mutual funds lean on the aggressive with their goals, while others are more conservative. As a result, it’s important to invest in a fund that aligns with your own financial goals.

Note: Advisors can’t make promises about fund performance!

Another factor that makes mutual funds a secure place for your money, is that they are diversified by design. As explained above, these funds are groups of investments. At any given time, within the investments of a mutual fund, one could be performing well while another is doing poorly. The variety of investments within a mutual fund help offset any dips by leveraging the rest.

Are mutual funds good for retirement?

For starters, mutual funds are a popular choice for retirement plans in Canada like RRSPs, RRIFs, and TFSAs. Since saving for retirement is a long-term goal, investors generally use a ‘buy-and-hold’ strategy. Many mutual funds fit nicely into this strategy. The longer you hold onto your investment, the more returns you can earn.

Do mutual funds pay dividends?

Many mutual funds have holdings like stocks or bonds that pay dividends, interest, or capital gains (if a stock has gone up in price). In this case, you’ll be able to receive these outright (in cash) or reinvest them in the fund.

Remember: you’ll need to pay taxes on any money you make from a mutual fund unless they are held in a registered plan (eg. RRSP, RESP, RRIF, etc). As always, withdrawals from registered plans (if allowed) are taxed as regular income.

How to invest in mutual funds in Canada

One of the biggest things to remember before diving into any kind of investing is to have clear financial goals. Part of this is knowing how long of an investment horizon you have. After all, your investment needs, goals, and risk tolerance will be very different whether you’re at your first post-university job or rounding the corner to retirement.

Another important step? Research, research, research. Take the time to weigh your risk tolerance — a decision that’ll help inform mutual fund choice. Since fees can be a bit pricey for mutual funds, check their management expense ratio (MER) as well as performance, comparing some of your top choices.

Tip: Use a Mutual Fund screener to help decide which mutual fund is a good investment. You’ll also get an overall view of performance. Screeners help you compare and review the current and average performance of different funds. You can filter and narrow down your options based on your criteria.

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