Chapter 12

In-Class Notes

Background on Mutual Funds• Advantages of Investing in Mutual Funds

• Diversified portfolio• Professional management• Marketability• Simplified record keeping

• Disadvantages of Investing in Mutual Funds• Management fees• Lack of control• Portfolio manager performance may be poor• Liquidity may be low

• Open-end vs. closed-end funds• Front-end load vs. back-end load vs. no-load• Management expense ratio (MER)

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Types of Mutual Funds

Equity BondGrowth CanadianSmall-cap and mid-cap High-yieldDividend IndexBalanced growth and income GlobalSectorIndexInternationalEthical

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Return and Risk of a Mutual Fund• Return• Distributions: interest income, dividends, capital gain

• Redemptions: capital gain

• Risk• All equity mutual funds are influenced by general stock

market conditions

• All bond mutual funds are influenced by interest rate risk

• Most bond mutual funds are influenced by default risk

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Deciding Among Mutual Funds• What is the minimum initial investment?

• What is the investment objective?

• What are the key characteristics of the investment company?• Past performance, MERs, and other fees

• Review the simplified prospectus• Investment objective

• Investment strategy12-5Copyright © 2009 Pearson Education Canada

Segregated Funds• Principal protection• Usually matures 10 years after the date of purchase• Deposit guarantee of between 75 and 100 percent

• Death benefit guarantee• Usually matures at death of policy owner• Deposit guarantee of between 75 and 100 percent

• Creditor protection• Money invested in a segregated fund is an asset of the

insurance company, not of the policy owner

• Management expense ratio• Can be double that of its mutual fund equivalent

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