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49 Cards in this Set
- Front
- Back
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Income Mutual Funds |
1) Money Market 2) Mortgage 3) Bond 4) Dividend => #1,2,3 distribute interest income and safety => Interest income is 100% taxable |
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Money Market Funds |
Term to maturity (1 year or less) (short-term debt)
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Securities found in money market funds |
-T-Bills -Banker's acceptances -Commercial papers -Provincial/municipal papers |
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Why does the money market have a fixed NAVPS? |
1) Principal is never eroded 2) Low-Risk (interest is only slightly higher than a typical bank account) |
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When do you recommend a money market fund? |
-If the individual has short-term needs -If the individual is looking for capital preservation only -If the individual is looking for a liquid "parking spot" or place to deposit their money (alternative to savings account) -If the individual has low-risk tolerance
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How do interest rates affect money market fund performance? |
If interest rates rise, money market funds rise =>direct relationship |
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When do you recommend Mortgage Funds? |
1)If the individual is looking for an income on a monthly basis 2) If the individual has a low-risk tolerance -low risk because mortgage funds are protected by CMHC against default -not tax-preferred |
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Bond Funds |
A mutual fund made up of a number of different bonds (i.e. corporate bonds, government bonds) with different lengths of maturity |
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When do you recommend Bond Funds? |
1) If the individual is looking for income 2) If the individual has low-moderate risk tolerance -moderate risk because longer-term investments than money market funds -not protected by CMHC |
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How do interest rates affect Mortgage and Bond Funds price? |
If interest rates rise, mortgage/bond funds fall => Inverse Relationship |
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Can you generate capital gains in a bond mutual fund? |
Yes -If the portfolio manager sells a bond at a premium (sells bond for a price higher than what you paid for it), capital gains can be generated |
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Dividend Fund |
A mutual fund made up of almost exclusively cumulative preferred shares -typically from "blue chip" corporations (i.e. Rogers) -moderate-risk investment |
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When do you recommend a dividend fund? |
If the individual is looking for tax-preferred income -dividends from Canadian Corporations are not 100% taxable If the individual is looking for the cumulative dividend income |
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Why are dividend funds more risky than bond funds? |
More fluctuations in the value of dividend fund in preferred shares than in bonds (more volatile) |
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Growth/Equity Market Place |
Made up of mostly common shares but has the following: -Equity -Global -International -Specialty -Real Estate -Index |
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Common Shares Investors |
Are hoping share values increase in the long-term -common shares do not provide interest income -recommend to those looking for growth investments |
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Equity Fund |
A fund made up of common shares from Canadian Corporations -diversifies itself by taking companies from all different sectors of the Canadian economy |
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What dictates the return for Equity Funds? |
-Industries Selected -How aggressive is the portfolio manager |
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2 Types of Equity Funds |
1) Small-Cap Fund 2) Large-Cap Fund |
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Small-Cap Fund |
An equity fund made up of smaller and newer emerging companies -larger growth potential -more risky than large-cap funds |
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Large-Cap Fund |
An equity fund made up of larger and reputable companies -less risky than small-cap funds |
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How does the economy affect equity mutual fund performance? |
When there is a bust in the economy (or recession), the NAVPS decreases When there is a boom in the economy (or recovery), the NAVPS increases |
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What is the risk associated with Equity Mutual Funds? |
There is no safety involved in equity mutual funds -fund is composed of 80% common shares and 20% in bonds, mortgages |
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Who would you recommend an equity fund to? |
1) Those looking for growth 2) Those who have prior investment experience 3) Those who are aware of potential gains/losses and risks |
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Global Mutual Funds |
A mutual fund made up of almost exclusively common shares -invested companies are from outside of North America but can have domestic equity |
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International Mutual Funds |
A mutual fund made up of almost exclusively common shares -invested companies are from outside of North America exclusively
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Why are International Funds more risky than Global Funds? |
-Exchange rate risk -Currency risk -Foreign economy risk (i.e. if the foreign nation has a bust in the economy) |
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What if you have capital gains in foreign equity? |
Not tax-preferred income (fully taxable income) => Global fund is slightly more tax efficient than an international fund |
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Specialty Fund |
A specific mutual fund that is made up of common shares -invests in companies from 1 specific part of the world (i.e. Russian equity fund, or science and technology sector) -eliminates diversification => More risky |
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Real Estate Fund |
A mutual fund that invests in commercial and industrial properties (i.e. shopping malls)
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How is income passed to investors in a Real Estate Fund? |
1) As people pay for their rent and leases, the income is passed to investors 2) If properties within portfolio are sold for a profit, capital gains can be passed to investors |
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Capital Cost Allowance (CCA) Distribution |
A yearly deduction on the cost of properties -deductible as rental income for investors -reduces capital gains -only real estate funds can distribute CCA |
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What is the risk associated with a Real Estate fund? |
1) If the real estate sector experiences a bust, the investment performance will suffer 2) Redemption request requires you to fill out T+3, but the trade date depends on the valuation date of investment properties, which are not valued daily (valued monthly or quarterly) =>Liquidity issues because of trade date |
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Real Estate Fund Exceptions |
1) Only fund to allow portfolio manager to borrow money to purchase assets 2) If fund does not have any cash on hand, you may not get any money back when you redeem it |
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Index Mutual Fund |
A mutual fund that tracks an index (i.e. stock exchange) -Passive Investment since the portfolio manager does not have to do much when choosing types of securities |
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When do you recommend an Index Mutual Fund? |
Recommend if people want to copy/mimic an exchange -If individual has moderate to high risk -If individual is looking for long-term growth -If individual is looking for dividends |
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Commodity Pools |
A pool that uses almost exclusively derivative products (i.e. rights, warrants, puts, calls, futures contracts) -A mutual fund in Canada is restricted (as a %) that can be based on derivative products, but a commodity pool has no restrictions => You cannot sell commodity pools with a mutual fund license |
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What if you have a client that wants long-term growth but is concerned with the risk associated with these type of investments |
Recommend a combination investment -Balanced Mutual Fund -Asset Allocation |
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Balanced Mutual Fund |
Balances a combination of equity (high risk) and fixed income (low risk) -Can be 40-60% equity -Can be 40-60% fixed income => But must carry each type of income within the set percentages => Has the opportunity for: -Interest income, bonds, mortgages, dividends with preferred shares, and capital gains with common shares |
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Asset Allocation Fund |
Similar to a balanced fund except no abiding of investing into set percentages of equity and fixed income (no set restrictions) |
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When would you want to adjust the asset allocation fund profile? |
1) If interest rates are high and you expect them to fall => Invest more in fixed income 2) If interest rates are low and you expect them to rise => Invest more in equity => Asset allocation fund manager has slightly greater opportunity to react to changes in market conditions than a balanced fund manager, but both managers have the opportunity |
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Target Date Funds/Life Cycle Funds |
Portfolios that automatically readjust fund profiles -target date in the future when you need your money, and the closer to the time you need your money, the more the portfolio will adjust to lower risk investments -most start out higher in equity component and will adjust to fixed income component automatically => recommend only if person has high risk tolerance |
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What can affect the risk and investment performance? |
1) Changes in the economy 2) Changes in interest rates 3) Political Issues 4) Shifts in market expectations |
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Types of Investments from Low to High Risk |
MMBBDAIEISRC My -> Money Market Mother -> Mortgage Buys -> Bonds Bad -> Balanced Fund Dogs -> Dividend Fund Always -> Asset Allocation In -> Index Funds Etobicoke -> Equity Funds Iqaluit -> International Sudbury -> Speciality Richmond Hill -> Real Estate Collingwood -> Commodity Pools |
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Serie A mutual funds |
Serie A mutual funds have a back-end charge or front-end charge -typically held in commission-based accounts |
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Serie F mutual funds |
Serie F mutual funds are fee based mutual funds -no front-end load or back-end load but an annual fee is paid for the value of assets =>Recommend for people that like to make frequent changes |
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Serie T mutual funds |
Serie T6 or T8 is more tax-efficient way to a SWP |
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Serie I mutual funds |
Serie I mutual funds is for institutions -large banks and corporations -pension funds |
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Management Fees and amount invested |
The more someone has to invest, the less the management fee a person will have to pay |
