Much akin to the dating process, selecting a mutual fund
requires there to be a good match! Thankfully, you will never encounter the
"psycho-type" in mutual funds, nor will there be an overly attached
fund. However, selecting the wrong fund could be disastrous especially if there
is that 30 days selling restriction I was referring to in the last mutual fund article.
Below are the various types of mutual funds:
Balanced Growth
This type usually means you get a bit of growth and a bit of
capital preservation. You will get close to 50% of it being invested in stocks,
the rest are in bonds and other safe alternatives such as Asset-Backed
Commercial Papers (ABCP) or something similar to GICs.
Growth
This type of fund will invest a majority of your money into shares
of growing companies, a couple years ago that would be companies such as Apple
and Google. You will likely not get monthly distributions if you invest in a
growth oriented mutual fund because those companies will not be paying
dividends, they would retain the cash for growth instead. If you want monthly
cash outs, you're knocking on the wrong door my friend.
Monthly Income
This is the fund you want if you want monthly distributions.
A majority of the fund will be invested into companies that pay dividends, this
usually means blue-chip companies. This mutual fund is relatively safe, I would
say safer than the above two types of mutual funds. It is definitely suitable
for those who are in retirement, but don't invest every dollar of your
retirement money in this of course because it's not a guarantee that it won't
drop in value. On the flip side, there is a possibility that the mutual fund can increase in value and thus yielding a gain in addition to the monthly distributions!
Foreign Holdings
Usually this type of fund will have the country's name in
the fund's name, eg. "US Blue Chip Equity" or "European
Growth". How risky it is would be dependent on the country's economy and
the type of investments it holds. Watch out for currency differences though,
your financial institution may charge an extra service fee for currency
conversions. It is possible that the fund is sold in $CDN though, I have
encountered that and in such cases you won't be charged a conversion fee by
your bank (or whichever financial institution of your choosing), basically the
fund covers it by accepting $CDN and converting it themselves later. What types
of investment this fund will hold depends on its objective and you should be
able to tell from the name of the fund.
Categorical or Sector Funds
They will invest into a specific sector or sectors, eg. "Health
and Sciences". These funds are still diversified in a sense because you
will be buying shares of multiple companies in that sector, but at the same
time less diversified because you are still confined within a particular industry.
However, with the higher risk involved you do get a higher return usually. I'm
fairly sure mine went up about 15% since the beginning of this year, it's the
Health and Sciences sector fund.
Anyways, as you can see folks there are a lot of different
types and depending on what your goal is and what you can stomach without
losing sleep, there is one just right for you. On the next article, I will be
covering the fees involved in a mutual fund. Stay tuned!
-TT
