How to buy mutual funds in Canada - MoneySense (2024)

Image by partystock on Freepik

Did you know that mutual funds have been around in Canada since the Great Depression? Though exchange-traded funds (ETFs) have gained popularity as an alternative, mutual funds are still the go-to option for many Canadians. According to the Investment Funds Institute of Canada (IFIC), at the end of 2022, there were 3,409 mutual funds and 1,056 ETFs in Canada. The total invested in mutual funds was about $1.8 trillion, compared to $314 billion in ETFs.

What are mutual funds?

We all want to benefit from the stock market, but not everybody feels comfortable buying stocks directly. This is where mutual funds come in handy. They’re a way to invest in the stock market without picking the assets yourself.

A mutual fund is a “pooled investment,” pooling together money from many investors—possibly thousands—to buy a portfolio of securities. Investors buy “units” that represent their ownership in the fund and give them indirect exposure to the securities held by the fund.

The value of each unit you own increases or decreases daily based on the underlying portfolio’s performance. For example, if you own 10 units worth $50 each, then the total value of your investment is $500—$50 multiplied by 10. If the fund’s portfolio gains 1% (net of fees), then the total value of your investment would increase by 1% to $505.

You can hold mutual funds in registered and non-registered investment accounts. Examples of registered accounts include registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), and they allow you to hold your investments on a tax-deferred or tax-free basis, as applicable.

What’s the difference between mutual funds and ETFs?

Mutual funds and ETFs have much in common, plus some crucial differences. They’re both types of pooled investment funds that offer investors diversification, convenience and professional management for a fee. The fee charged is the fund’s management expense ratio (MER), and is a percentage of the assets invested.

Mutual funds and ETFs are bought and sold differently.

• ETFs are bought and sold on an exchange, just like stocks. The price of an ETF share may fluctuate from one moment to another in the course of a trading day, just like the prices of stocks do.
• Mutual funds are bought and sold through either a dealer or a stock broker. The price of a mutual fund unit—called the “net asset value per share” (NAVPS)—is calculated just once each weekday, at 4 p.m.

Mutual fund MERs are typically higher than comparable ETFs, because investors receive advice from a financial advisor. While the decision to work with an advisor or not depends on your personal circ*mstances and preferences, research has shown that working with an advisor could potentially create up to 2.3 times more wealth over time.

Here are other factors to consider when choosing your investments:

• How comfortable you are with buying and selling shares of ETFs yourself, rather than, for example, investing in mutual funds with the assistance of a financial advisor? (Note that your MER will change if you work with an advisor.)
• ETFs tend to passively track an index, while most mutual funds are actively managed, where the portfolio manager of the fund seeks to outperform its benchmark.

What to consider when choosing mutual funds?

There are several types of mutual funds available on the market. Consider these factors before investing:

• Investment time horizon: If you have a long time horizon (for example, seven years or more), you could consider mutual funds that try to deliver long-term capital appreciation. Some investors prefer actively managed mutual funds because they offer the potential for outperformance over time.
• Investment goal: If you’re saving for a specific short-term goal, such as a down payment for a home, you could consider a mutual fund that invests in money-market instruments or very short-term fixed-income securities.
• Risk tolerance: Some investors are aggressive, some are conservative and the rest are somewhere in between! When choosing a mutual fund, consider its stated risk level available on the issuer’s website or the “fund facts” document.
• Investment objective: Some mutual funds are geared towards generating income—say, in the form of stock dividends—while others may focus on capital appreciation. This information can also be obtained from the fund’s webpage or fund facts document.

How to buy mutual funds in Canada

Investors have two main options for purchasing mutual funds:

• Financial advisors: Canadian investors can find a financial advisor at their bank branch or at a wealth management firm. Those who are licensed to sell mutual funds can help you navigate the various investment options.
• Discount brokerages: If you manage your own investments, you could buy and sell mutual funds online through a discount broker. If you’re a DIY investor searching for low-fee mutual funds, you could access Series F or an equivalent low-fee series from a discount broker. In this case, you could be charged a trading commission—a flat fee or a percentage of the transaction value.

If you want a convenient and straightforward way to invest in a diversified portfolio without doing the heavy lifting yourself, mutual funds may be the right option for you. But before you jump in, consider various options to find the funds best suited to your time horizon, investment goals, risk tolerance and investment objective.

For more information about Fidelity Investments mutual funds, click here.

Read more about investing:

• What’s under the hood? A look at what goes into all-in-one ETFs—and how they work
• Using ETFs to get the most out of your TFSA contribution room
• 5 ways to invest sustainably for Canadian investors
• Emotional investing: How to make better decisions with your money