1 - General
1.1 What's a mutual fund?
1.2 What's an RRSP (Registered Retirement Savings Plan)?
1.3 What's a GIC (guaranteed investment certificate)?
2 - Mutual Funds
2.1 Why should I invest in mutual funds?
2.2 How do I pick the funds that are right for me?
2.3 What’s the best time to start investing?
2.4 How do I find out what my investor profile is?
2.5 Should I review my Personalized Investment Plan on a regular basis?
2.6 How often should I invest?
2.7 How can I find out what my risk tolerance is?
2.8 How do I minimize my risks?
2.9 What's the relationship between risk and return?
2.10 Are my mutual fund investments guaranteed?
3 - ETFs – Exchange Traded Funds
3.1How is an ETF different from a mutual fund?
3.2 How do ETFs maintain liquidity?
3.3 What is the difference between the Net Asset Value (NAV) per unit and price?
3.4 Why does an ETF trade at a premium or discount to its NAV?
3.5 What is Tracking Error?
3.6 What are the differences between Actively managed ETFs and Passively managed /Index ETFs?
1 - General
1.1 What's a mutual fund?
A mutual fund is simply a pool of money from a number of investors with similar goals. When you invest in a mutual fund, you buy part of the fund, called a unit. The more money you invest, the more units you receive. Decisions concerning the fund are made by managers. Mutual funds invest in a wide range of securities, notably common and preferred shares, debt securities such as bonds and debentures, as well as money market instruments such as Treasury bills.
1.2 What's an RRSP (Registered Retirement Savings Plan)?
An RRSP is an investment vehicle that allows an individual to defer some income tax on invested money. No tax is payable on the invested money or on the capital gains until time of withdrawal—usually at retirement. An RRSP is an excellent way to save for your retirement.
1.3 What's a GIC (guaranteed investment certificate)?
A GIC is a security issued by a financial institution certifying that a certain amount of money has been invested at a certain interest rate for a given period or time and will yield a specific amount (the final return). There are other types of GICs, such as index-linked GICs, for which the final return is not known at time of issue. GICs are protected by the CDIC to a maximum of $100,000 per institution.
2 - Mutual Funds
2.1 Why should I invest in mutual funds?
There are many advantages to investing in a mutual fund:
Professional management: With mutual funds, you benefit from the expertise of portfolio managers who draw on the latest research reports and data to make sound investment decisions.
Diversification: Diversification means being invested in a number of different securities. Most investors don't have enough money to build a well-diversified portfolio on their own. But with mutual funds, you can invest in a variety of industries and securities at the same time. If the return on one security is disappointing, it will be offset by a higher return on another.
Variety: Investors can choose from various types of funds, such as income funds, equity funds, balanced funds or specialized funds. There is a mutual fund for every investment goal. Furthermore, mutual funds enable you to invest in markets that are not easily accessible to individual investors, such as foreign markets.
Flexibility: Our firm does not charge a fee for any changes made to your individual investments or if a transfer between accounts is performed You can also sign up for a systematic investment plan or a systematic withdrawal plan, where your activity is automated.
Quick access to your money: It’s easy to sell your mutual fund units at any time.
Tracking: As a mutual fund investor, you receive statements, financial reports and tax slips on a regular basis, making it easier to monitor your investments.
2.2 How do I pick the funds that are right for me?
There are mutual funds on the market to meet all investment goals. In general, the more volatile the investment, the higher the potential return. The Personalized Investment Plan is the perfect tool to help you with this kind of decision. After answering six questions, developed and tested by our research department, you will find which investor profile matches your investment goals and your degree of risk tolerance, as well as the most suitable asset mixes to meet your needs.
2.3 What’s the best time to start investing?
Anytime is the right time to start investing. The golden rule is not to speculate, but to plan according to your goals. Patience is an investor's best friend, and the statistics prove it: a mutual fund investment can earn you a lot over the long term, in spite of market corrections.
2.4 How do I find out what my investor profile is?
To find out what kind of investor you are, you must analyze the following points. This will help you determine an efficient investment strategy.
Your investment goals. Are you investing for retirement, to buy a home, to finance your children's education or for something else?
Your investment horizon. When will you need your capital? In 5, 10 or 25 years? If you are investing for your retirement in, say, 30 years, you can build up a diversified portfolio using a more aggressive strategy. Since you are investing for the longer term, you will have enough time to recoup any losses you might suffer as a result of unfavourable market fluctuations.
Your risk tolerance. Your personal ability to tolerate risk is an essential element in determining your investor profile. If you lie awake nights worrying about your investments, then you're probably taking too many risks. If your goal is to receive interest and keep your money safe, and a higher long-term return really isn't that important to you, then a less risky investment with a lower potential return could suit you very well. However, if you are saving up for your retirement and you're invested for the long term, you may want to assume a higher level of risk and take advantage of higher growth potential.
Your financial situation. Could you take a market correction in stride? Your overall financial situation will help you determine the level of risk you can tolerate in your investment portfolio. Investors who have lots of other assets will find it easier to withstand fluctuations in their portfolio. Investors who are in a less stable financial situation may be less risk tolerant.
Your investment knowledge and experience.There are many inexperienced investors who overestimate their ability to tolerate risk. Investors who are just getting started often think they have a high degree of risk tolerance until they start having sleepless nights at the first sign of a market fluctuation. It's better to start cautiously in order to test yourself. There's nothing to stop you from reviewing your portfolio every six months to a year to adjust your risk-tolerance level.
2.5 Should I review my Personalized Investment Plan on a regular basis?
You should review your Personalized investment Plan at least once a year in case there have been any changes in your situation, your investor profile or your portfolio mix. For instance:
- the fund family you are investing in may offer new funds;
- because financial markets don't all evolve in the same direction at the same time, you need to see whether you should readjust your portfolio to ensure that it still matches your profile;
- your personal situation may change. A new job, an inheritance or the purchase of a home are all elements that must be taken into consideration.
2.6 How often should I invest?
It can be hard to be disciplined about saving. A good solution is to enrol in a systematic investment plan. You can contribute weekly, monthly or quarterly. This helps you develop the financial discipline needed to achieve your goals.
2.7 How can I find out what my risk tolerance is?
There are several factors to consider. Your financial situation, your age and your goals are very important. If you have a mortgage to pay off and a family to raise, then your risk tolerance may be lower than if you had no dependents and no large payments to make.
2.8 How do I minimize my risks?
Diversify. Diversify. Diversify! Asset classes don't all move in the same direction at the same time. Since it's impossible to predict which asset class will be the best performer from one year to the next, the best investment strategy is to invest in several of them, in a proportion that corresponds to the level of risk you are willing to accept.
2.9 What's the relationship between risk and return?
Risk and return are closely related. If you want a higher return, you've got to be prepared to assume more risk meaning more ups and downs. Each type of fund has its own level of risk and return.
2.10 Are my mutual fund investments guaranteed?
No, they aren’t. Unlike bank accounts and GICs, mutual fund units are not covered by the Canada Deposit Insurance Corporation (CDIC) or any other government deposit insurance authority.
3 - ETFs – Exchange Traded Funds
3.1 How is an ETF different from a mutual fund?
“ETF” stands for exchange traded fund, which, like a regular mutual fund, may invest in an underlying basket of assets such as stocks, bonds, currencies, options or commodities. Unlike regular mutual funds, however, the units of ETFs trade on a stock exchange just like common stock. This means that pricing is transparent and ETF units can be bought and sold throughout the regular trading day.
ETFs are flexible investment tools designed to be used by both individual and institutional investors. As a basket of investments, ETFs offer the diversification of mutual funds, but typically at a fraction of their cost.
3.2 How do ETFs maintain liquidity?
Similar to mutual funds, ETFs are typically structured as an open-ended investment trust, meaning that new units of the ETF can be created (or redeemed) to meet demand as required. The liquidity of the ETF unit on the stock exchange is heavily dependent on the liquidity of the underlying holdings in the ETF portfolio. There are two important market mechanisms to ensure ETFs have adequate liquidity:
- They are listed on an exchange; this provides a market for them to be traded in a transparent manner.
- Each ETF has a designated broker obligated to create and redeem its units. In addition, there are other institutional traders known as Market Makers which also participate in the market to provide units on the exchange. This enables an investor to buy and sell units of the ETF at a price that is close to the NAV, excluding any brokerage fees.
3.3 What is the difference between the Net Asset Value (NAV) per unit and price?
All ETFs have two end-of-day "values". They have a closing market price per unit, as determined on the exchange, (the trading session's last trade), and a net asset value per unit (NAV), as determined by the ETF's independent fund accountant after the market closes.
The closing price is typically the last transaction price of the ETF recorded by the Toronto Stock Exchange, whereas the NAV per unit is an independent calculation created by the ETF’s fund accountant, which calculates the market value of each unit based on the underlying value of the securities held by the ETF net of all its liabilities.
Since there may be a lag between the last time the ETF traded and changes in the underlying value of the ETF’s holdings, the NAV per unit would generally be considered a more accurate representation of the market value of the ETF.
3.4 Why does an ETF trade at a premium or discount to its NAV?
A premium or discount to an ETF’s NAV per unit occurs when the market price of an ETF is above or below that NAV per unit.
The importance of understanding a premium and a discount is relevant when considering investing in an ETF. The level or size of premiums and discounts is generally greater when:
- the underlying assets of the ETF trade at different hours from the ETF (i.e. commodities)
- the underlying assets trade infrequently (i.e. bonds)
- the markets are in a greater state of instability or flux (i.e. at the Open and Close of a trading day)
For any passive ETF that seeks to replicate the returns of an index or commodity benchmark, the success of the investment strategy is usually measured by how closely the ETF replicates the returns of that index or commodity benchmark. Any deviation from the return of the ETF versus the return of that index or commodity benchmark is generally considered tracking error.
Tracking error can be caused by a variety of factors including management fees, trading execution costs and taxes.
3.6 What are the differences between Actively managed ETFs and Passively managed /Index ETFs?
Actively managed ETFs
• Managed by one or more portfolio managers
• Seeks to deliver better risk-adjusted returns than an index by selecting the portfolio securities for the ETF that meet its investment goals
• Slightly higher than index ETFs, but generally much lower than comparable actively managed regular mutual funds
Passively managed ETFs
• Tracks an index
• Seeks to replicate the performance of an index as efficiently as possible
• Low cost, since minimal portfolio oversight is required beyond replicating the index