Mutual Fund Definition

The main types of mutual funds are money market funds, bond funds, equity funds, dividend funds, mortgage funds and real estate funds. Within these broad categories are many smaller sub-categories. For example, there are many different types of equity funds that differ by level of risk as well as index funds, which track a particular market index (e.g. the TSX).

• Balanced funds consist of a combination of the main categories listed above and provide a means of further managing risk through fund diversification.
• Money market funds invest in short-term money market instruments such as Treasury bills, commercial paper and short-term government bonds. They represent low risk and high liquidity, but also earn a lower rate of return than other funds.
• Bond funds invest in government and corporate bonds with the objective of generating income and maintaining the safety of principal.
• Equity funds invest in common stocks issued by companies, primarily with a view to generating capital gains. Equity funds have a higher risk than money market or bond funds, but also provide the greatest potential for high returns. Equity funds are seen as good long-term investments such as, historically, common stocks have performed better than bonds and money market instruments over the long term.
• Dividend funds invest in preferred shares and common shares paying dividends in order to take advantage of the dividend tax credit as well as potential capital gains.
• Mortgage funds invest mainly in mortgages on residential units but may also include mortgages on commercial and industrial property, while real estate funds invest in income-producing real property. Mortgage funds offer income and safety while real estate funds offer long-term growth through capital appreciation.

Two innovations that are becoming increasingly popular are clone funds and wrap accounts. Clone funds are 100-per-cent RRSP-eligible funds that allow investors to mimic the return of actively managed foreign mutual funds. Wrap accounts are accounts where brokers manage groups of investments consisting of stocks, bonds, cash and mutual funds for a set annual fee, rather than receiving fees on a transaction basis.

Equity Funds made up 55 per cent of all mutual funds in December 2001, followed by balanced funds at 16 per cent and money market funds at 15 per cent. Within equity funds themselves, about half of the assets were invested in foreign common shares and half in Canadian common shares. over 64 per cent of all mutual funds are in some sort of international or offshore investment in December 2006.