Since mutual funds are financial investments called "securities"
which can be bought and sold, they are regulated by governments.
In Canada, this is a responsibility of the Provincial governments. In
Ontario for example, mutual funds and the people who sell them are
regulated by the Ontario Securities Commission (OSC). They must have a "prospectus"(
a legal description of the fund) which ensures disclosure of all relevant
information concerning a mutual fund. Mutual fund companies and sales
agents are also regulated to make sure that they provide proper
information to potential investors.
Mutual funds are established by fund sponsors, who are usually the fund
management company. They go through the legal work of having a fund
approved and make the initial investments in the fund. In return, the fund
structure usually allows for the fund company to recover their costs and
administration expenses and receive a "management fee" for
providing the investment management for the fund. These expenses are taken
out of the fund on an ongoing basis. The level of these fees compared to
the total assets of a fund is referred to as the "Management Expense
Ratio" or "M.E.R." and usually ranges between 0.5% and 3.5%
of fund assets. Any significant changes to the fund requires approval by a
vote of the unitholders, as set out in the trust indenture.
There are many types of mutual funds, such as equity, bond, balanced and
money-market, which invest in domestic or foreign marketable securities.
There are also mutual funds that invest in real estate, mortgages, and
other less liquid types of investments. Recently, labour-sponsored funds
have taken advantage of Canadian Income Tax legislation which allows
investors to shelter invested monies from income tax in exchange for
investment in smaller, start-up companies. |