1. What is the fund's goal?
Make sure the fund’s goal fits with your investment goals. Does the fund provide regular income? Does it fit with the length of time you plan to invest, and your personal goals? Does it work with your other investments?
2. How risky is the fund?
You can make or lose money on a mutual fund. Does the fund’s level of risk fit with your tolerance for risk? Do you find it difficult to handle price fluctuations? If a fund’s returns vary a lot from year to year, it may be considered higher risk because its performance can change quickly in either direction.
Find out the fund’s level of risk and whether it fits with your own tolerance for risk. Usually, the higher the potential returns, the higher the risk will be.
3. How has the fund performed?
Past performance can’t tell you how the fund will perform in the future. But it can give you an idea of how the fund compares to other funds with the same investment objective. Don't just look at how the fund performed last year. How consistent has it been over the long term? How has it performed in different market conditions?
4. What are the fund's costs?
All funds must disclose their fees and expenses in their Fund Facts document and simplified prospectus. Consider all of the costs. For example, a fund with a low management expense ratio (MER) could have very high sales charges, and vice versa. Understand what you'll pay when you buy or sell units of the fund. Also consider what you’re getting for your money. What level of service and advice will you receive?
Compare the fund’s costs and performance against similar funds to see what kind of value you’re getting.
5. Who manages the fund?
The success of a mutual fund depends on the portfolio manager’s skill at choosing investments, and knowing when to buy and sell them. What kind of education and experience does the portfolio manager have? Does the manager run other funds? How successful have they been? What is their investment style? Find out how stable the fund's management has been over the years. High turnover can be a warning sign.
Do your research
Find out as much as you can about a mutual fund before you buy. A good place to start is with the disclosure documents that a mutual fund company is required by law to file with securities regulators. You can find these on the mutual fund company's website, the System for Electronic Document Analysis and Retrieval (SEDAR), or you can ask your adviser.
Disclosure documents include:
- Fund Facts document – a plain language summary of key information about the fund, such as performance, risk and costs.
- Simplified prospectus – detailed information on things like investment objectives and strategies, fees and expenses, risks, tax considerations and distributions. The mutual fund company is required to deliver a prospectus to you within 2 days of you buying the fund.
- Management reports of fund performance – report of the fund’s returns for various periods and a discussion about what affected the fund’s performance in the past year.