Risks of mutual funds
Like most investments, mutual funds have risk — you could lose money on your investment. The value of most mutual funds will change as the value of their investments goes up and down.
The level of risk in a mutual fund depends on what it invests in. Usually, the higher the potential returns, the higher the risk will be. For example, stocks are generally riskier than bonds, so an equity fund tends to be riskier than a fixed income fund.
Some specialty mutual funds focus on certain kinds of investments, such as emerging markets, to try to earn a higher return. These kinds of funds also tend to have a greater risk of a larger drop in value.
6 common types of risk
|1. Market risk
||The value of its investments decline because of unavoidable risks that affect the entire market|
|2. Liquidity risk
||The fund can’t sell an investment that’s declining in value because there are no buyers.|
|3. Credit risk
||Fixed income securities
||If a bond issuer can’t repay a bond, it may end up being a worthless investment.|
|4. Interest rate risk
||Fixed income securities
||The value of fixed income securities generally falls when interest rates rise.|
|5. Country risk
||The value of a foreign investment declines because of political changes or instability in the country where the investment was issued.|
|6. Currency risk
||Investments denominated in a currency other than the Canadian dollar
||If the other currency declines against the Canadian dollar, the investment will lose value.|
One way to assess a fund’s level of risk is to look at how much its returns change from year to year. If the fund’s returns vary a lot, it may be considered higher risk because its performance can change quickly in either direction.
How your investment is protected
Because mutual funds are securities — and not deposits — they're not protected by the Canada Deposit Insurance Corporation (CDIC) or other deposit insurance. But other safeguards are in place to protect investors:
- third-party custodian – holds the assets of a mutual fund. This is usually a trust company or chartered bank
- independent auditor – reviews and reports on the fund's financial statements each year.
If a firm goes bankrupt
Your mutual funds may be covered by 1 of 2 investor protection funds. You must file a claim within 180 days after the firm declares bankruptcy.
These investor protection funds do not cover losses from other causes, such as changing market values of securities, unsuitable investments or the default of an issuer of securities.
1. Canadian Investor Protection Fund (CIPF)
The CIPF provides protection of up to $1 million to eligible customers of a firm that is a member of:
2. MFDA Investor Protection Corporation (IPC)
The IPC is an investor protection fund of the Mutual Fund Dealers Association of Canada (MFDA). It provides protection of up to $1 million to eligible customers of MFDA members.