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Student Investment Guide Part IV: Getting to Know Mutual Funds

Mutual funds are more complex than the savings and chequings account that most students are comfortable with. But they’re worth
learning about if you want your money to work harder for you.

By Knowlton Thomas

staple to most investment portfolios will
A mutual funds. But it’s important to
istinguish between a working investor’s
objectives and the objectives of a student investor.

Obviously, a student has less money to work
with. Plus, they need lower risk investments.
And—although this should be avoided as much as
possible —it can be important for students to have
the option to get their investment money back in a
pinch (and still retain profits).

With these differences in mind, choices
for students investing in mutual funds become
slightly limited. Why? Many mutual funds require
minimum investments anywhere from $1,000 to
$100,000. Many have high management expense
ratios (MERs) and other commissions, which
means you see a bigger cut from your profits taken
if you try to sell your funds often or early. And
many are simply too volatile to be considered for a
student portfolio.

Fret not, however, as there is still a healthy
stable of fund options students can select from. But
first, what’s a mutual fund?

A mutual fund is a pool of investment
securities (stocks, bonds, commodities, etc.—even
other funds). A fund can consist of any combination
of these, which is why funds offer such wide
diversity potential. Each fund is overseen by a fund
manager, who constantly monitors the performance
of the fund and adjusts it accordingly by buying
and selling securities. Mutual funds allow you to
access securities and sectors you wouldn’t be able
to tap into on your own, offering simplified (yet
still relatively complex) solutions to diversifying
your investment portfolio.

Mutual funds are broken down into “units,” the
value of which vary tremendously by each fund,
and fluctuate on a daily basis. This is why I always,
always recommend “dollar cost averaging” — that
is, buying less units more often purchases as
opposed to lump sum purchases. For example,
invest $25 into a mutual fund every week instead
of $100 per month, or instead of $1000 upfront
and then not again for a year. This allows you buy
more units when they’re cheap, and less when
they’re expensive, combating the effects of market
volatility. (Any financial institution will allow
you to set up these automatic unit purchases at no
additional charge. It’s standard strategy)

Market Funds

As I outlined in Part Ill of this guide, beating
the market is an ideal and realistic goal for
investors of all levels. So it may seem ironic to
suggest a market fund, which invests small amounts
into mass amounts of companies that spread across

all sectors—in essence, mimicking the overall
market itself.

I wouldn’t recommend relying heavily on
market funds, but they can offer stability, and
financial institutions like ING Direct offer very
simple market funds that can be opened online and
self-managed (plus, they tend to have some of the
lowest MERs). And while these don’t often beat the
market, for obvious reasons, at least you’ ll know
they won’t lose to it.

Dividend Funds

Ah, dividends. They are their own breed
of investment returns, and I’ll cover them as a
separate entity in Part V of this guide. For now,
know that dividends are tax-efficient and easy
money. Dividend funds invest in, you guessed it,
companies with above-average dividend yields.
Income distribution from dividends, typically
monthly or quarterly, is automatically put toward
purchasing more units of your fund, so you can
Own more units without spending more cash. Plus,
companies offering high dividend yields, such as

 

banks and large-cap, blue-chip organizations, are
historically very stable and provide strong long
term capital growth.

The only drawback is that dividend funds are
primarily equity funds, which means there is often
minimum investment amounts required, and your
financial advisor may be wary of a student trading
more volatile funds (forge onward, nonetheless,
young champion).

Fixed-income and money market funds

These funds invest in things like bonds
and fixed-income investments, and keep higher
percentages of their asset pool in cash. Their returns
are some of the lowest in the mutual fund realm,
but they are also extremely stable and losing money
is very rare. They also tend to have low minimum
investment amounts and can be appropriate for
shorter-term investment goals.

Next week: The magic of dividends, inside and
outside of mutual funds.

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