22.4 - MUTUAL FUNDS AN INTRODUCTION When selecting funds...

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MUTUAL FUNDS – AN INTRODUCTION When selecting funds the investor must fully understand the relationship between performance, risk and reward. Reward should always be proportionate to risk. If the investors do not understand this, they are likely to have unrealistic expectations that invariably cannot be met. In simplest terms, low risk funds (or investments of any nature, for that matter) should provide the lowest returns. Higher risk funds should, on average, deliver higher returns. Bank accounts, for example, are typically very secure, low risk investments that typically deliver very low returns. Leveraged investments offer greater potential for higher returns, but carry appreciably more risk. The following is a brief overview of the different types of mutual funds available. 1. Money Market Funds A money market fund is designed to provide a higher level of regular income than a savings account along with a high degree of capital preservation. It does so by investing in short-term money market instruments such as treasury bills and commercial paper. They are typically low risk/low return funds, and, therefore, are suitable for very conservative investors. In Canada, the most common types are Canadian and U.S. dollar- denominated funds, the difference being that U.S. dollar funds also offer the potential for capital gains or losses from currency exposure. Money market funds normally hold their net asset value constant at a certain price (commonly $10.00) by distributing all the fund’s income on a monthly basis. The level of income is normally a function of interest rates, and money market returns normally rise as interest rates increase. Money market funds also serve as a safe haven during periods of stock market volatility, and, although their returns may be modest, they typically outperform equity and bond funds in periods of rising interest rates and declining stock markets. For this reason, many investors use them as ‘parking vehicles’ when they become nervous about stock or bond market valuations.
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2. Income Funds For many investors, receiving regular income is a primary investment objective. These investors typically desire a higher level of income than that provided by a money market
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22.4 - MUTUAL FUNDS AN INTRODUCTION When selecting funds...

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