A mutual fund is a group of stocks, bonds and other investments that are owned by a large number of investors and managed by a professional investment company. The money you contribute to a mutual fund buys you shares, or units, of that fund. A common investment objective (eg. long-term growth) and an agreement of the way it can be achieved (eg. by investing in large Canadian companies) are what draw investors to a particular fund.
There are primarily three different types of investments for mutual funds: cash (usually in the form of Treasury bills), bonds (usually very secure government or corporate bonds) and equities (shares in Canadian or international corporations). Your mutual fund will invest in one of these asset classes or a combination.
When you invest in a mutual fund, you purchase a certain number of units of the fund. A professional money manager takes the entire pool of money from all of the fund's investors and invests it in a carefully selected range of investments. The manager buys and sells those investments to maximize returns for the investors -- within the investment guidelines outlined in the prospectus.
The fund's value -- and the value of your units -- can go up or down from day to day. Some funds will fluctuate more than others and you will want to consider this factor when you choose a fund. A fund which experiences significant ups and downs in its value is probably not an ideal choice if you are saving for a short-term goal, for example. The cost of a fund's units is updated daily, based on the fund's performance.
Many factors influence how your mutual fund performs, including the value of the underlying investments, changes in interest rates and other economic trends -- even the buy/sell process.
When you purchase units in a mutual fund, you agree to pay certain fees and expenses, usually deducted directly from your investment. Be sure you understand these fees, as well as how to both buy and sell your units.
B. Kirk McNamee, CFP