What are mutual funds? And how can they help you save faster?

A mutual fund is a type of investment product (or investment fund) containing a collection of investment securities. These could include equities (shares in companies), bonds (loans to companies or governments), alternative investment assets or a combination of them.

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Mutual funds in Canada normally have a specific focus, for example, U.S. equities, Canadian bonds, large Canadian companies, international small and medium companies or a specific sector, region or country. Some Canadian mutual funds are designed to have a specific impact, for example to invest in companies that are fighting climate change or promoting gender diversity.

When you invest money in a Canadian mutual fund, it’s pooled with money from a large number of other investors, and an asset manager (a professional investment manager) decides which stocks or bonds to include in the mutual fund (based on their investment philosophy and field of expertise), and how much of each. If more people invest in the fund, more units of the mutual fund are issued.

Mutual funds can play a large role in helping investors grow their money faster. A recent survey found that 90% of mutual fund investors felt more confident about reaching their financial goals by investing in mutual funds rather than with any other type of investment. 

In this article, we’ll lift the lid on the workings of Canadian mutual funds, including; what are the types of mutual funds available; are mutual funds a good investment; what is a mutual fund’s benchmark; how much do mutual funds cost; and how do you make money from mutual funds? 

How do mutual funds work in Canada?

When you’re looking to invest so that your savings grow faster, it can be risky to only invest in a small number of companies. If one of those companies were to fail, you could lose a lot of money.

This is where diversification comes in. Diversification is the strategy of investing in a wide range of shares and bonds so that, if one of those investments falls through, it would only have a fairly minor impact on the value of your overall savings.

The problem is, for individual investors, it can be very time consuming and expensive to create a portfolio of stocks and bonds that’s diversified enough to give you adequate safety. Normally, when you buy or sell an asset (stocks or bonds), the stock brokerage charges a fee (usually a flat fee, or it could be a percentage of the total purchase price). It can therefore become extremely costly to put together a well-diversified portfolio, particularly if you’re buying or selling shares regularly.

Also, you’d need a high level of expertise and understanding of the stock market to put together a successful portfolio. Most individual investors simply don’t have the ability or the time to do this.

Enter mutual funds. By effectively pooling your money with thousands of other investors, you get to benefit from the financial returns from dozens or even hundreds of different equities and/or bonds. You also benefit from your money being managed by a professional asset manager who’s focused solely on managing the portfolio, so you don’t have to constantly keep a vigilant eye on the ups and downs of the markets.    

What kind of mutual funds are available in Canada?

There are several types of Canadian mutual funds available to investors, including:

  • Equity mutual funds: these contain stocks from a wide range of companies.
  • Fixed income mutual funds: these hold a range of bonds issued by governments (federal, provincial or local) or by companies (corporate bonds).
  • Balanced mutual funds: these contain a mixture of equities and fixed income assets.
  • Money market mutual funds: these hold short-term fixed income investments, such as short-term U.S. Treasury bills.
  • Global mutual funds: these contain stocks and/or bonds from around the world.
  • Specialty mutual funds: these hold stocks or bonds from a specific region (for example, Europe) or sector (for example, technology and energy).
  • Index mutual funds: these attempt to replicate the performance of a particular index, such as the S&P 500, which is an index of the biggest companies in the U.S.
  • Mutual fund of funds: these consist of several mutual funds or exchange-traded funds (ETFs).   

The difference between active and passive mutual funds in Canada 

If a mutual fund is designed to replicate an index, it’s considered a passive mutual fund, because, once the fund is created (containing the same assets that are in the index), there is no active management required. The mutual fund should perform very similarly to the index it’s replicating (for example, if the index goes up in value, so will the mutual fund).

With actively managed mutual funds, the fund manager will buy, hold and sell assets, in an attempt to get the best return possible for the fund. With these sorts of mutual funds, you get the benefit of the experience and expertise of the fund manager. The fund manager will draw from a huge range of data (and is often backed by a team of analysts) to help them make their buying and selling decisions. They typically combine analysis of the market and the economy with each of the companies whose shares are held in the fund. 

What is a mutual fund’s benchmark? 

On the whole, a benchmark is an index of a market or sector that can be used to measure the performance of the mutual fund against. Some Canadian mutual funds are designed to replicate the performance of a specific market index, while others can be measured against a blended benchmark, which may be a combination of three or more benchmarks. It makes it easy to see if a mutual fund is overperforming or underperforming. 

A market index is a hypothetical portfolio of investments that represents a specific segment of the stock market. These indices are created and managed by companies such as Standard & Poor (S&P), Dow Jones and Morningstar.

These are some of the most famous market indices:

  • S&P 500: this follows (roughly) 500 of the biggest companies in the U.S. and is often considered a benchmark for the American stock market in general. 
  • Dow Jones Industrial Average (The Dow): this tracks the performance of 30 of the largest American companies listed on the New York Stock Exchange and the Nasdaq, many of which produce industrial and consumer goods. It includes companies like Apple, Goldman Sachs and MIcrosoft. 
  • Nasdaq Composite: this is designed to represent the entire Nasdaq Stock Market, which contains a high concentration of tech companies. There are over 3,000 companies represented in the index.
  • S&P/TSX Composite: this is a representation of Canada’s biggest companies, with over 200 included in the index (around 70% of the value of all companies listed on the Toronto Stock Exchange).
  • MSCI All Country World Index: this tracks thousands of stocks from almost 50 developed and emerging market countries.

Investing in an index mutual fund in Canada is a low-cost, effective way to invest in a large segment of the market. For example, if you wanted to grow your savings by investing in Canadian companies, a mutual fund with the S&P/TSX Composite Index as its benchmark would be ideal.

There are many market indices, however, and many of them allow you to invest in more niche sectors of the market, which can bring more diversification to your investment portfolio. For example, you could invest in a Canadian mutual fund that follows the index of Chinese companies, international bonds, specific sectors or European companies.

Also, the objective of active mutual funds is to perform better than certain market indices, rather than simply replicate their performance. The mutual fund would therefore use that index to measure its own performance, with success being defined as a higher overall return over the long term than the index it’s pitted against.     

How do you make money with mutual funds in Canada?

There are several ways that you make money from a Canadian mutual fund:

  • The interest earned from the bonds in the portfolio.
  • Dividends from companies held within the mutual fund: many companies pay dividends to their shareholders, and the mutual fund company may pass these on to investors.
  • Capital gains: if the mutual fund’s net asset value (NAV) increases while you own it, you could sell it at a profit. 

Depending on the mutual fund company, your preference, or the mutual fund you’ve invested in, the distributions could be paid out to you in cash or reinvested into the mutual fund (thus increasing the value of this investment). They are paid out either monthly, quarterly or annually. 

What are the costs of mutual funds in Canada? 

There are fees and expenses involved when investing in Canadian mutual funds. Some fees are paid by the fund itself, while others are paid by the investor. The overall cost of investing in a mutual fund is called the management expense ratio (MER) and includes any expenses, operating costs, portfolio management fees and possibly trailing commissions, as well as other costs related to legal requirements and the administration of the fund.

The MER is a percentage of the amount of money you invested in the mutual fund and is calculated annually. You won’t receive a bill for your mutual fund’s MER: the amount owed will be taken out of the returns from the fund.

Management expense ratios can vary considerably, depending on the type of mutual fund you invest in and the amount of input needed from an asset manager. For index mutual funds, that input is nominal, so the MER should be fairly low compared to actively managed mutual funds.

Funds that are designed to outperform the benchmark require a lot more effort from extremely experienced and talented fund managers, who are supported by a team of analysts and researchers. The assets in the fund are constantly monitored, as are opportunities and risks within the mutual fund’s remit, to help the fund deliver higher returns. Therefore, not surprisingly, actively managed mutual funds have higher management expense ratios.

Mutual fund MERs can be as low as around 0.5% and as high as 3% (though most don’t go far above 1.5%).   

The pros and cons of mutual funds 

As with any investment option, Canadian mutual funds have advantages and disadvantages. For some investors they may not be a good fit, while for others they could form the basis of their whole investment portfolio.

Here are some key mutual fund advantages:

  • They provide a much cheaper and more practical way of diversifying your portfolio than if you were to invest in stocks from hundreds (or even dozens) of companies.
  • You can get access to professional investment management expertise.
  • You can invest in them for a fairly small amount of money (you can often have an initial investment as low as $500, with subsequent investment amounts as low as $50).
  • They are traded once a day, so they are fairly easy to buy and sell.
  • With actively managed funds, you get the benefit of a team of expert investment managers looking after your money.
  • You can buy them from a wide range of financial institutions. 

However, there are some disadvantages to mutual funds, including:

  • Like many other investments, the value of mutual funds in Canada can go down as well as up. Depending on the type of mutual fund, you could see a considerable drop in its value if the market drops.
  • Mutual fund management fees will reduce your overall returns (there are lower-cost options, such as exchange-traded funds).
  • You don’t have control over what’s contained in the fund (which is why it’s important to do your homework on the fund manager).
  • Too much diversification can limit your returns; for example, if one stock goes through the roof, you’ll only see a moderate benefit from holding it in your mutual fund.

Mutual funds versus ETFs

In recent years, another type of investment fund has been growing in popularity: the exchange-traded fund, or ETF for short. ETFs are very similar to mutual funds, in that they also hold a large number of assets in the one fund, however, there are key differences between ETFs and mutual funds.

ETFs are traded on a stock exchange, in the same way as shares. Therefore, whereas Canadian mutual funds can only trade once a day (after their net asset value has been calculated), Canadian ETFs can be traded during a stock exchange’s trading hours.

Many exchange-traded funds are passively managed and follow an index. These ETFs can have fairly low management fees, with some having MERs as low as 0.04%. Other exchange-traded funds have more input from fund managers and can have MERs as high as 0.75%. You may also have to pay a fee to buy or sell ETFs.

The key benefit of mutual funds versus ETFs is that they typically have a high level of active management involved, from experienced fund managers and their team of analysts and researchers, all working to achieve better results for your investment.  

Mutual fund FAQs:

Can I have mutual funds in my RRSP?

Yes, RRSPs (as well as RESPs and TFSAs) can hold a wide array of investment assets, including mutual funds, ETFs, bonds and shares listed on designated stock exchanges.

How much should I invest in mutual funds?

This will very much depend on your overall investment goals. Your financial advisor can put together a financial plan that will include investments, and help you to calculate the ideal amount to invest every year, including in mutual funds. 

How are your investments protected with mutual funds in Canada?

If the assets held in your mutual fund lose value, your mutual fund will lose value. There is always an inherent risk when investing in the stock and bond markets. However, if the investment firm that manages your mutual funds goes bankrupt, the Canadian Investor Protection Fund provides protection of up to $1 million.  

What do mutual funds invest in?

They invest in a huge range of investment assets, with the most common being bonds and shares. There are mutual funds that focus on specific geographical regions or sectors, and some that invest in alternative investments, such as private equity, private credit and private infrastructure. Others invest in property (and typically contain several different real estate investment trusts, or REITs for short).

Am I guaranteed a return from a mutual fund?

No: unlike a high interest savings account or guaranteed investment certificate, there are no guarantees with mutual funds. Over time, the value of mutual funds typically increases, but this is never a given.

Are mutual funds a good investment?

That depends on your investing goals and the kind of investor you are. However, for many investors, mutual funds are a great investment for providing comprehensive diversification of their portfolio and for helping their savings grow faster.

What should you consider before investing in a mutual fund in Canada? 

You need to have a financial plan, first and foremost. Then, you need to consider the time frame for each of your goals. If it’s a short time frame, you’ll want to consider safer mutual fund options, such as fixed income mutual funds. If it’s a long time frame, you’ll want to consider equity or growth mutual funds.

You’ll also want to think about Canadian mutual funds that have in-built defence strategies in case of market volatility (these funds can mitigate the effects of a market slump), or funds that prioritize preserving your capital.

You’ll also need to consider your own tolerance for risk. If you’re comfortable with riding out the ups and downs of the stock markets, then equity mutual funds could be the best option. If fears of market crashes keep you up at night, fixed income mutual funds might be a better option.

These are all considerations that your advisor will help you with. 

How to start investing in mutual funds

Before you invest in anything, you need a comprehensive financial plan that takes into account every aspect of your financial life. It should include your cash flow (your income and outgoings), planning for major purchases, being prepared for the unexpected and saving for retirement.

An IG Advisor will spend time to get to know you, your current situation, where you want to be and all of your financial goals. They’ll put together your IG Living Plan, which will outline all of your goals and how to reach them within your preferred time frame. Within that plan will be their recommendations for investments that will help you to reach those goals, which will typically include mutual funds.

They’ll go over their recommendations with you and explain the rationale behind their investing decisions. Once your initial investments are made, they’ll monitor their progress and make sure that the assets in your portfolio are still suited to your overall plan and are the best way for you to reach your goals.

Talk to your IG Advisor today to discuss the best mutual fund options for your unique circumstances. If you don’t have an IG Advisor, you can find one here.  


Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.

Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).

Commissions, fees and expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated. Mutual funds and investment products and services are offered through Investors Group Financial Services Inc. (in Québec, a Financial Services firm). And Additional investment products and brokerage services are offered through Investors Group Securities Inc. (in Québec, a firm in Financial Planning). Investors Group Securities Inc. is a member of the Canadian Investor Protection Fund.

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