What is a Mutual Fund?

A mutual fund is vehicle that enables a number of investors to pool their money and have it jointly managed by a professional money manager.

The fund is divided into units and each holder is entitled to a proportionate share of the fund. Each "unit holder" has the right to their share of the assets of the fund and any income that the fund earns. Under tax law, the fund must distribute all of its income each year, to itself avoid taxation. These "distributions" of realized capital gains, interest and dividend income are made as frequently as monthly.

Mutual funds are regulated by governments, which ensure that adequate information is available to prospective purchasers and unit holders about the fund characteristics and its performance. The major fund disclosure document is called the prospectus. Each fund is required to be audited and to provide statements to the unit holders. Major changes to the fund require unit holder approval.

Mutual funds may invest in practically anything, according to what is provided for in the fund documents. Equity mutual funds invest in the common shares of corporations. Bond or income funds invest in the bonds of governments and corporations. Mortgage funds invest in residential and commercial mortgages. Money market or short-term funds invest in government treasury bills and the corporate commercial paper, all under one year in term. Balanced funds invest in a mixture of bonds, stocks and money market instruments and alter the proportion of these investments according to the manager's view of these investments.

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