Mutual Fund Investing Basics
A mutual fund is a pool of investments managed by a professional portfolio manager. The portfolio manager invests the money on behalf of a group of investors who have similar investment goals. The fund’s goals are outlined in the fund objectives and how the portfolio manager invests the money to meet the fund’s objective are outlined in the fund’s strategies.
Depending on the fund’s investment objective, a mutual fund can invest in stocks, bonds, cash, or other mutual funds or exchange traded funds. BMO Mutual Funds are further categorized as Security, Income, Growth, Equity Growth, U.S. Dollar Funds and Managed Solutions.
Mutual Funds provide many benefits, including professional money management and diversification with broad investment options across sectors, asset classes and geographies. They are easy to buy and are also available with low minimum initial investment amounts.
Building a Financial Plan
The best approach to achieve your specific investment goals is to build a financial plan. Depending on your personal investment knowledge, it may be a good idea to seek advice from an investment professional. An investment professional will help you to build your personalized, tailored plan and monitor it with you on an on-going basis. Some of the things you will need to think about are what you are saving for, how long you plan to stay invested and your risk tolerance.
A plan will help you stay invested and stay focused on your long term goals. See Saving for Retirement and Saving for Education for specific investment strategies related to these goals.
Risk Reward Trade-Off
In selecting the mutual funds that best meets your individual needs, you will need to consider the trade-off between risk and returns.
The value of a mutual fund can go up or down. Mutual funds are affected by things like changes in interest rates, economic conditions in Canada or around the world or news about companies the fund invests in. How big the fund’s value changes are is a measure of risk. This is called volatility.
Investments that have the highest return potential fluctuate more with the market in the short term and have a greater possibility of gaining value over the long term.
Diversification is an important investment strategy to help reduce volatility and manage risk.
Prospectus and Fund Facts
Every mutual fund company must publish and file with the regulators on an annual basis a simplified prospectus and fund facts for each fund and series it offers for sale. The prospectus and fund facts contain a lot of relevant information on the funds you hold.
As a result of recent regulatory changes implemented in 2014, the prospectus is no longer delivered to investors at the point of sale, unless specifically requested by the investor. The fund facts document is now mailed to investors after the sales process is completed.
Mutual Fund Fees
Mutual funds have associated fees. The cost of owning a mutual fund is called the Management Expense Ratio (MER). The MER is an annual fee that is charged by the fund to pay for the costs of running the fund and includes the management fees and operating expenses. The management fees and operating expenses are also subject to applicable taxes. The MER varies by fund and by series. Learn More
The fund may also be subject to a Trading Expense Ratio (TER). The TER represents the costs each fund spends on brokerage commissions for buying and selling the underlying investments. The TER is not part of the MER. Typically, new funds, funds with high portfolio turnover or funds with foreign securities will typically have a higher TER.
The MER and TER for each series can be found on the most recently filed fund facts.
Sales or Redemptions Charges
In addition to the MER, certain series of funds may have sales or redemptions charges. Advisor Series, Series T5, Load Series T6, and Series T8 may also have a sales charge or redemption fee. Each of these series is offered in a front-end, deferred sales charge or low load sales charge option.
You may pay an up-front fee, negotiated between you and your dealer at the time of purchase, if you buy the front-end sales charge option of any of the above series. You will pay a redemption fee if you sell your investment within a certain time period if you buy the deferred or low load sales charge options.
Refer to the FAQ [anchorlink] for more information: What costs are associated with mutual funds?
How do investors make money from a mutual fund?
Investors in a mutual fund can make money from:
- Income distributions – a fund can earn income such as interest and dividends, and from time to time distribute that income to investors.
- Capital gains distributions – a fund will realize capital gains when it sells an investment for more than its cost. A fund can also realize a capital loss if it sells an investment for less than its cost. Each year, a fund will distribute its net realized capital gains to investors.
- Capital growth – the value of an investment in a fund will rise when the value of the fund’s investments rises, even if the fund has not sold the investments.
If you hold your mutual funds in a registered plan, distributions can only be reinvested in additional securities. If you hold your mutual funds in a non-registered account, distributions will normally be reinvested in additional securities, but you have the option to request to receive distributions in cash.
Taxes and your Mutual Funds
In general, you’ll have to pay tax on any money you make on a fund. How much you pay depends on the tax laws where you live and whether or not you hold the fund in a registered plan such as a Registered Retirement Savings Plan or a Tax-Free Savings Account.
If you hold your mutual funds in a registered plan, generally, neither you nor your registered plan is subject to tax on distributions paid by the mutual fund or on capital gains realized when the mutual funds are redeemed or switched. If you hold your mutual funds in a Tax Free Savings Account (TFSA), your investment will grow tax free and you can withdrawal your money tax free.
If you hold your mutual funds in a non-registered account, distributions will be subject to tax whether they are received in cash or reinvested in additional securities. The amount of tax you pay depends on the type of distribution and your marginal tax rate. If your mutual fund increases in value, then you will be required to pay tax on the gain when you sell the fund.
An investing approach that aims to identify and invest in securities that may be mispriced by the market with the view of generating enhanced returns. It's a strategy that can involve amongst other things, in-depth analysis of companies' financial statements and significant understanding of various markets and companies from around the world.
The sum of the differences between the percentage weight of each security in a portfolio and the percentage weighting in a benchmark or comparator index.
American Depository Receipts. ADRs are a type of negotiable financial security that is traded on a local stock exchange but represent a security that is issued by a foreign publicly-listed company.
Annualised return (%)
An annualised total return is the geometric average amount of money earned by an investment each year over a given time period.
Annualised volatility is a statistical measure of the dispersion of returns for a given security or market index for each year over a given time period.
Annualized Rate of Return
An annualized rate of return is a cumulative return expressed as an equivalent annual compounded rate. A compounded rate of return includes the effect of interest-on-interest.
A type of investment such as stocks, bonds, real estate or cash.
The amount of money invested in a fund. Also referred to as Net Asset Value (NAV).
Basket of Securities
in relation to a particular BMO ETF, a group of securities determined by the Manager from time to time representing the constituents of the applicable index in approximately the same weightings as such constituents are weighted in the applicable index.
A standard against which the performance of a security or mutual fund can be measured. Generally, broad market indexes are used for this purpose.
A debt instrument promising to pay its holders periodic interest (or coupon) payments on a fixed amount of principal and maturity.
As a form of restriction, a floor provides a limit for a particular activity or transaction to which it must adhere. The floor functions as a lower limit.
Cash and Cash equivalents
This asset class includes money market instruments and are short-term, highly liquid, low risk and relatively low return investment holdings.
Continuous Savings Plan (CSP) Amount
The amount you can automatically invest in your mutual funds on a weekly, bi-weekly, monthly, bi-monthly, quarterly, semi-monthly, monthly or annually basis. Once you set up a CSP, we'll automatically transfer money from your bank account to buy units of the funds you choose.
The conversion price is the price per share at which a convertible security, such as convertible bonds or preferred shares, can be converted into common stock. The conversion price is set when the conversion ratio is decided for a convertible security.
Current yield is an investment's annual income (interest or dividends) divided by the current price of the security. Current yield represents the return an investor would expect to earn, if the owner purchased the bond and held it for a year. However, current yield is not the actual return an investor receives if he holds a bond until maturity.
Date Started / Inception Date
The date that a fund became available for sale to investors.
Deferred Sales Charge (DSC)
If you purchase your funds under the deferred sales charge option, you may be required to pay a fee if you redeem your fund units within a specified number of years after your purchase. Some fund companies offer both a Standard Deferred Sales Charge option and a Low Load Deferred Sales Charge option (i.e. over a reduced number of years).
A delta is a ratio, sometimes referred to as a hedge ratio. It compares the change in price of an asset with the change in price of a derivative or option based on that same asset. A delta can be either positive or negative.
Specialized investments like forward or future contracts, options contracts, and swap agreements whose value is based on the value of another investment called an underlying investment.
a registered dealer, including BMO Nesbitt Burns Inc., an affiliate of the Manager, that has entered into a designated broker agreement with the Manager, on behalf of one or more BMO ETFs pursuant to which the Designated Broker agrees to perform certain duties in relation to the BMO ETFs.
The amount of times during a year that a mutual fund pays distributions to unitholders. This is typically monthly, quarterly or annually.
Distribution Payment Date
: a day which is no later than the 10th business day following the applicable distribution record date, on which a BMO ETF pays a distribution to its Unitholders.
Distribution Record Date
a date determined by the Manager as a record date for the determination of Unitholders of a BMO ETF entitled to receive a distribution.
Deferred profit sharing plans as defined in the tax act
measures the approximate sensitivity of a bond's price to a change in interest rates. A duration of , for example, means that the price of the bond would decrease/increase by approximately 2% if the interest rate increased/decreased by 1%.
Duration to put
Is the duration of the bond to the next exercise date of an option – also known as the option adjusted duration.
Effective duration is a duration calculation for bonds that have embedded options. This measure of duration takes into account the fact that expected cash flows will fluctuate as interest rates change.
The length of time it takes for a bond to reach maturity, taking into consideration that certain actions, such as a call or refunding, may cause some bonds to be repaid before they mature.
Indicates types of registered plans a mutual fund may be held in.
Environmental, Social and Governance (ESG)
ESG is the framework that breaks the broad concept of sustainability down into three key issues - Environmental issues, Social issues, and Governance issues.
Shares of ownership in a company.
Equity Growth Funds
A category of BMO Mutual Funds, these funds maximize return potential through investing in specific market sectors or emerging economies with greater growth potential. These may entail greater risk than conventional growth funds.
ETF Summary Document
summarizes certain features of the ETF such as performance and total cost. All purchasers of an ETF will receive this publicly available document.
Ethical investing refers to screened funds with the strictest investment criteria that avoid investing in any company that may have a poor record on environmental, human rights or other ethical grounds. An investment philosophy that tends to be guided by moral values, ethical codes or religious beliefs.
Annual and semi-annual fund specific reports that provide the financial position of the mutual fund.
Front-end Load (Sales Charge Option)
Under a front-end (FE) load option, you pay a commission to your dealer when you buy units of a fund. The commission is usually negotiable between you and your dealer.
The Fund Facts documents highlight key information about each available series of a fund, including the performance history, risk ranking, investor suitability and the cost of buying and owning a fund.
Fund Total Assets
The amount of money invested in a fund, also referred to as Net Asset Value (NAV). NAV is calculated by adding the total value of the Fund's assets and subtracting the liabilities.
A category of BMO Mutual Funds, these funds provide potential for higher long-term returns, often by investing in stocks. They range from relatively conservative equity funds that specialize in high quality Canadian "blue chip" stocks to funds that invest in major global stock markets. It's important to remember that higher growth potential may entail greater risk.
Impact investing goes beyond a passive approach to ESG and involves funds with a clearly expressed intention to generate positive, measurable, social or environmental impact, alongside a financial return.
The date that a fund became available for sale to investors.
A category of BMO Mutual Funds, these funds typically invest in bonds, mortgages and other fixed income securities. The level of income and risk depend on the characteristics of investments in the fund's portfolio.
The information ratio (IR) is a measurement of portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns. The benchmark used is typically an index that represents the market or a particular sector or industry.
Interest rate duration
A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
Included in the prospectus and fund facts, the fund's objective outlines the goals of the fund.
The last date that a payout was made to unitholders of the net income or realized capital gains earned by a mutual fund.
Low Load Deferred Sales Charge (Low Load)
If you purchased your funds under the low load sales charge option (LL), you may be required to pay a fee if you redeem your fund units within a specified number of years after your purchase. Some fund companies offer both a Standard Deferred Sales Charge option and a Low Load Deferred Sales Charge option (i.e. over a reduced number of years).
An investment solution that wraps a mix of underlying mutual funds and/or ETFs into a single portfolio.
Management Expense Ratio (MER)
The management expense ratio is the total annual fee charged by the fund to pay for the costs associated with running the fund. It includes the management fee, operating expenses and applicable taxes. It does not include the TER. It is expressed as an annualized percentage of the average net asset value of the funds.
Each fund pays the manager a fee for management services and this fee is included in the fund's MER. The management fee is a percentage of your total investment and varies by fund and by series. It does not include a fund's operating expenses related to the operation of the fund.
Management Report of Financial Performance (MRFP)
Annual and semi-annual fund-specific reports that includes a management discussion of fund performance; financial highlights; past performance, and a summary of portfolio holdings as at the end of the relevant period.
BMO Asset Management, a Canadian investment manager responsible for providing managerial, administrative and compliance services to the BMO ETFs.
NAV per Unit
in relation to a particular BMO ETF, the net asset value per unit, calculated by dividing the NAV of the BMO ETF by the total number of units outstanding.
A no-load mutual fund does not require you to pay a sales charge or redemptions fee when you buy, switch or redeem units of the fund.
Each fund pays operating expenses that include administration fees related to the day to day operation of the fund such as audit, legal, recordkeeping system and custodian fees. Operating expenses are included in the management expense ratio (MER) of a fund.
An investing approach that provides access to a broad market, for example, through an index fund or exchange traded fund (ETF) that typically tracks the performance of a market index.
Registered individual who manages the assets and expenses of a mutual fund according to the fund's objectives.
The market value of one unit of a mutual fund on a given day. Net Asset Value (NAV) is calculated by adding the total value of the Fund's assets and subtracting the liabilities. To find the net asset value per security (NAVPS), the Fund's Net Asset Value is divided by the total number of securities outstanding.
The simplified prospectus is a legal document that contains important information about each BMO Mutual Fund to help investors make investment decisions and understand their rights as investors. The prospectus includes the fund objectives and strategies, associated fees and risks as well as distribution policy.
RDSP (Registered Disability Savings Plan)
A plan that provides people with disabilities an easy and effective way to save and invest for their long-term financial security.
Real rates duration
A measure of the sensitivity of the price of a bond or other debt instrument to a change in real interest rates.
Registrar and Transfer Agent
in relation to a particular BMO ETF, CIBC Mellon Trust Company.
The price at which unitholders, who have opted to reinvest their distributions, buy additional units of a mutual fund with the distribution proceeds.
RESP (Registered Education Savings Plan)
A plan that allows investors to save for post-secondary education on a tax-sheltered basis.
Responsible investing is an umbrella term that incorporates a range of practices and approaches in the consideration of key environmental, social and governance (ESG) risks, opportunities and impacts of the investments we make.
RIF (Retirement Income Fund)
A plan that holds your retirement savings and provides income after you retire. There are rules about how much you may take out each year.
ROC (Return of Capital)
A mutual fund trust may distribute a ROC if it distributes more than its net income and net realized capital gains. A ROC distribution is not included in your income, but instead reduces the adjusted cost base ("ACB") of the securities on which it was paid.
Sales Commissions (Load)
You may be required to pay a commission when you buy the (front-end load) version of a mutual fund.
A category of BMO Mutual Funds that help you preserve wealth, while providing a modest level of income. They offer safety of principal, regular income payments and easy access to money should you need it. Money market funds are typical security funds.
Short-term Trading Fee
A fund may charge a short-term trading penalty (e.g. up to 2% of the amount that you redeem or switch) if you buy or switch and then redeem or switch securities of a fund within a specified number of days (e.g. 30 days) of purchasing or switching them. This penalty is meant to discourage short-term trading by investors because it may adversely affect all investors in a fund.
Socially Responsible Investing (SRI)
Socially responsible investing is the practice of investing money in companies and funds that have positive social impacts.
Strategic Asset Allocation
An investing approach that maintains a predetermined mix of asset weightings within a portfolio. For example, a simple strategic allocation model might target a weighting of 60% in equities and 40% in bonds. Because the value of investments can change over time, the portfolio would be rebalanced regularly to maintain the preset asset weightings.
Sustainable Development Goals (SDGs)
The Sustainable Development Goals are 17 goals set by the United Nations in 2015 that act as a global framework for achieving a better and more sustainable future. They address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, prosperity and peace and justice. The UN is targeting completion of all 17 interconnecting goals by 2030.
Sustainable investing is a method of investing which proactively seeks companies to invest in that makes positive contributions in addressing social and environmental challenges.
Tactical Asset Allocation
An investing approach that aims to take advantage of perceived market opportunities by increasing a portfolio's weightings in some assets and reducing other assets correspondingly. This approach may also include placing upper and lower bounds around asset class allocations. For example, for equities in a portfolio, a lower bound might be 40%, an upper bound 80% and a neutral weighting 60%.
A plan that provides tax-free growth on savings in which investors can make tax-free withdrawals at any time. There is an annual contribution limit, with the ability to carry forward unused contribution room.
for each BMO ETF, a day on which: (i) a session of the TSX is held; (ii) the primary market or exchange for the majority of the securities held by the BMO ETF is open for trading.
Trading expense ratio (TER)
The TER represents the costs each fund spends on brokerage commissions for buying and selling the underlying investments. The TER is not part of the MER. Typically, new funds, funds with high portfolio turnover or foreign securities will have a higher TER.
Trailing Commission (Service Fees)
This is an ongoing type of service commission paid by fund companies to dealers and brokers for the continued advice and service they provide to investors. They are usually based on the value of the units of the funds that their clients hold.
The Toronto Stock Exchange.
a holder of units of a BMO ETF.
BMO Asset Management
each Trading Day and any other day designated by the Manager on which the NAV and NAV per Unit of a BMO ETF will be calculated. If that BMO ETF elects to have a December 15 year-end for tax purposes as permitted by the Income Tax Act (Canada), the NAV per Unit will be calculated on December 15.
4:00 p.m. EST on each Valuation Sat or, if the market closes earlier that day, then the time as of which the market closes.
Year to Date (YTD) Return
as at a specific date during a calendar year, the rate of return beginning January 1st of that calendar year to the specific date.
Yield to Best
The greater of the yield to maturity and yield to put for a convertible bond where the investor also has a put option back to the issuer (typically at par).
Yield to maturity (%)
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but it is expressed as an annual rate.