Mutual Fund Types

A mutual fund is a pool of money that is invested by a professional manager on behalf of a large group of people. Mutual funds are made up of some or all of the three main asset classes: money markets, fixed-income and equity. Some funds may be a combination of two or more asset classes and are referred to as balanced funds.

Within each class, mutual funds come with their own specific investment objectives, risks and rewards. The money raised from issuing new units of the fund is invested according to the fund's investment policies and objectives. For example, a fund with long-term growth objectives within the framework of the Canadian economy would invest in common shares of Canadian companies, while a fund whose objective is to earn income in the short term might hold bonds or mortgages.

In most cases, a mutual fund's returns consist of the dividends and interest it receives on the securities it holds, and the capital gains it may generate in trading its investment portfolio.

Money Market funds

Of the three asset classes, these funds offer the lowest risk to investors. The underlying investments are a combination of short-term debt, generally focused on Canadian or U.S. markets, which provides minimal return potential but a high level of safety.

Fixed Income funds

As the name implies, the purpose of these funds is to deliver income. The funds focus on stability and income rather than growth and are generally more conservative investments than most equity funds. However, because the credit quality of investments varies, the risk profiles of fixed income funds may also differ significantly.

A high-yield bond fund, for example, is much riskier than a bond fund that invests exclusively in government debt. Other fixed-income funds are differentiated by average duration:

• Short-term: less than 3 years
• Medium-term: 3 to 10 years
• Long-term: 10 years plus

Equity funds

These funds invest in stocks. The fund's prospectus will provide you with greater insight into the style of the fund. Some funds focus only on companies of a certain size (e.g. Canadian-Focused Small/Mid Cap Equity funds). Others focus on a specific country (e.g. Japanese Equity) or sector (e.g. Health Care Equity).

The investment objective of most equity funds is capital appreciation and growth. Some, however, will focus on dividend income as well (e.g. Canadian Dividend & Income Equity).

Some equity funds attempt to mirror the performance of an underlying index and are aptly called index funds. Still others follow a specific investment philosophy. For example, they may invest only in companies deemed to be socially or environmentally responsible.

Balanced funds

These funds provide investors with a mixture of safety, income and capital appreciation. They will hold fixed-income securities for stability and income, as well as a wide variety of common stocks for diversification, dividend income and growth potential. However, the proportion of the fund allocated to each asset class and the qualities of the specific assets vary. Some examples of balanced fund types include Canadian Fixed Income Balanced, Global Neutral Balanced, and Global Equity Balanced.

Other fund types

Fund of funds: Technically a balanced fund and often referred to as a portfolio fund, these mutual funds invest in a basket of other mutual funds, offering diversification by asset class, geography and industry sector. 

Managed payout funds: If you’re an income-seeking investor, a managed payout fund could be of interest to you. These funds provide a regular cash flow back to investors. The cash flow is made up of capital gains, dividends and interest, and may include a return of the investor’s capital.

Target date funds: These are balanced funds with a mandate to adjust their target asset allocation weightings over time as the maturity date approaches. 

Specialty funds: These funds focus on alternative investment strategies, venture capital, or other areas that do not fit within traditional mutual fund categories.