1. What is the fund’s goal?
Make sure the fund’s goal fits with your investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition goals. Does the fund provide regular income? Does it fit with the length of time you plan to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition, 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 fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the funds goals for risk and return. You can redeem your fund units at any time.+ read full definition. 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? If the fund’s investment objective has changed in recent years, its past performance will be even less of a reliable predictor of its future performance.
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 managerPortfolio manager An investment professional who manages your investment portfolio. For example, they buy, sell and monitor investments that fit their clients goals and tolerance for risk.+ read full definition’s skill at choosing investments, and knowing when to buy and sell them. What kind of education and experience does the portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition 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 – a plain language summary of key information about the fund, such as performance, risk and costs. Beginning May 30, 2016, mutual fund companies are required to give investors a copy of Fund FactsFund Facts A user-friendly guide that provides key information about a mutual fund including fees and performance. Mutual fund companies are required to give investors a copy of Fund Facts before they decide to purchase a fund.+ read full definition before they decide to purchase a conventional mutual fund.
- Simplified prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition – detailed information on things like investment objectives and strategies, fees and expenses, risks, taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition considerations and distributions. The simplified prospectus is available to investors from the mutual fund companyMutual fund company An investment company that pools money from investors and invests it in a mix of investments, such as stocks, bonds, and money market investments. Most mutual fund companies offer a choice of more than one fund.+ read full definition upon request.
- 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.
5 questions to ask
- What are the fund’s goals?
- How risky is the fund?
- How has the fund performed?
- What are the fund’s costs?
- Who manages the fund?