Investing in BMO mutual funds

The BMO mutual fund is from Canada’s oldest bank. Is it worth the investment?

Investing in BMO mutual funds

Mutual funds are a great investment tool. Not only do they have the potential to provide good returns on your investments, but they offer considerable protection against risk, due to their diversified nature. As they are a diversified investment, mutual funds also provide an individual investor with a much wider variety of investments they could not normally have access to or afford.  

Investors in Canada are fortunate, as they can choose from over 5,000 mutual funds offered by some of the most established financial institutions. One of them is the Bank of Montreal.

In this article, we discuss some interesting facts about the Bank of Montreal, and why an individual investor or portfolio manager might want to consider investing in BMO mutual funds.

A short history of the Bank of Montreal

The Bank of Montreal holds the distinction of being Canada’s first bank. The Bank of Montreal (ticker symbol BMO in the TSX and NYSE) was established in Montreal, Quebec, in 1817.

In June 23 of that year, a man named John Richardson and eight other merchants got together in a rented house to sign the Articles of Association to create a bank named “Montreal Bank”. Montreal Bank would initially conduct business in that house, then move to a permanent office on Rue Saint-Paul a year later.

Three years after moving office, “Montreal Bank” would get its name changed to Bank of Montreal.

Decades after the name change, Bank of Montreal would become one of the Big Five, which simply meant the big five banks of Canada.

With a capitalization now amounting to C$1.251 trillion in total assets, BMO has since put up over 800 branches in Canada that provide various financial services for 7 million people.

Since 1990, BMO has served customers in the greater Chicago area, then branching out to the other United States via its subsidiary BMO Harris Bank, under the BMO Financial Group.

In 1994, BMO itself became the first Canadian bank to get listed on the NYSE. Bank of Montreal also has two other subsidiaries:

  • BMO Capital Markets – handles investment and corporate banking
  • BMO Nesbitt Burns – handles wealth management (named after one of BMO’s founders)

On the Forbes Global 2000 list, Bank of Montreal ranked 84th. And in a recent strategic move to further spur growth of its North American business, Bank of Montreal spent US$16.3 billion and acquired Bank of the West from BNP Paribas. The acquisition was completed on 12 December 2021.

BMO’s long history of reliability

Apart from having the distinction of being Canada’s first and oldest bank, Bank of Montreal has the honor of being one of the most reliable financial institutions when it comes to dividend distributions. Ever since it began making dividend payments in 1829, it has never missed a single dividend payment.

BMO has consistently paid out dividends despite major events like the Great Depression, World Wars I and II, and even the financial crisis of 2008. Although to be fair and accurate, the 2008 financial crisis affected Canada much less than it did North America.

What type of mutual funds does BMO offer?

Much like other banks and financial institutions in Canada, BMO offers mutual funds that are among the most commonly available. Their extensive list of mutual funds include:

  • Money Market Funds
  • Bond/Income Funds
  • Balanced Funds
  • Equity Funds
  • Global Funds
  • Other Funds (Emerging markets/Sector-specific funds)

Due to the varying nature of the underlying stocks, the risks associated with these funds can vary as well. There are also different corresponding fees for each type of mutual funds, so each of their Management Expense Ratios (MERs) can also be variable.

As with all mutual funds, the higher the risk, the greater the potential earnings or losses and the greater the variation in their unit prices.

How do BMO Mutual Funds work?

As with any mutual fund, BMO mutual funds work as a pooled investment. Many different investors place different amounts of money they’re willing to invest. They can then use these to buy small slices or shares of the mutual fund.

BMO mutual funds trade on the stock exchange. Since they mostly deal in this volatile commodity, values can fluctuate greatly and often.

BMO mutual funds are cobbled together based on industry best practices, like having experienced fund managers formulate realistic and attainable investment objectives. Note that BMO offers both active and passive mutual funds.

Mutual fund earnings can include:

  • Dividends
  • Interest
  • Capital gains

In terms of managing the fund, investors or portfolio managers have two options:

1. Actively Managed

This means that the mutual fund is handled by a fund manager who works to buy and sell the constituent stocks, bonds, and other investments to achieve set investment objectives.

Actively managing a mutual fund can take on several forms. Some examples are:

  • A mutual fund manager picks stocks and bonds themselves to buy and sell for a fund
  • An individual investor researches and picks out individual stocks themselves to buy and hold
  • An individual investor trades in and out of index ETFs, or uses index ETFs to time the market
  • A hedge fund manager uses leverage and short-selling strategies

2. Passively Managed

This means that the portfolio manager uses an existing index as their guide and works to duplicate the returns of these indexes on their mutual fund.

This can entail mimicking the proportions of the assets of an existing index and applying that to the mutual fund. Some passively managed funds can even have the name “index” on them to indicate that they’re passively managed.

Investors should bear in mind that regardless of whether they adopt an actively or passively managed strategy, there are still charges, fees, and commissions on mutual funds to consider. These can reduce investment returns and the amounts can vary.

In most cases though, these associated costs are lower for index funds. Savvy investors should make it a habit to read the fund facts before committing to a mutual fund.

Choosing between an active management or passive management strategy when it comes to mutual funds is a hotly contested topic. While both strategies of managing the mutual fund have their pros and cons, ultimately it can be up to the individual investors or mutual fund managers to decide how to best achieve their investment goals.

Why investors may want to consider BMO mutual funds

Choosing to invest in BMO mutual funds offers several benefits. For one, there’s a considerable number of mutual funds they offer. To date, investors can choose from 117 different actively and passively managed funds. Other benefits include:

Compatible with all registered accounts

BMO mutual funds can be tied to any and all registered account types. Investors can have their earnings go directly into their Registered Retirement Savings Plans or RRSPs. They could do the same with their RRIFs, TFSAs, RESPs, or RDSPs.

As this mutual fund casts the widest net possible, investors can take full advantage of the fund and earn for virtually any account type or investment goal.

Continuous savings feature

BMO offers a Continuous Savings Plan or CSP, which allows anyone with a small initial investment to make additional investments automatically. The money is added each month to the BMO mutual fund. Investors can even trace or predict the fund’s progress with BMO’s CSP calculator.

Good mix of portfolio and fund options

BMO mutual funds are comprised of the most common types, such as income funds, equity growth funds, money market funds, global funds, and much more. They offer at least 6 different portfolios to choose from as well.

Personalized advice

It’s easy for potential investors in BMO mutual funds to contact an advisor. You can book a personal appointment, schedule a call or use their online support tool.

Potential drawbacks to BMO mutual funds

This would not be a balanced view on BMO’s mutual funds if the possible cons were not mentioned, so here they are:

They have relatively higher MERs than other mutual funds

Management Expense Ratios can negatively affect your BMO mutual fund earnings. Although it’s true that investors in mutual funds never have to deliberately pay the MER, some money is still deducted before it enters the accounts.

The MER for BMO mutual funds ranges from 0.08% to 2.88%, which is not too bad, but it’s not exactly good either. How can this hurt your earnings from this mutual fund?

Let’s assume the MER is at its peak of 2.88%, and your BMO mutual fund reflected earnings of 12% after a given period. Your mutual fund would have earned 14.88% were it not for the higher MER!

The $500 initial investment might be hefty

The BMO mutual fund requires a starting investment of $500 which may be out of reach for some who are new to investing.

Should aspiring investors find this amount a bit much, they can use BMO’s Continuous Savings Plan to help them get started on the mutual fund.

How to Invest in BMO Mutual Funds

Thanks to the power of the internet and communications technology, getting started in BMO mutual funds can be as easy as setting up an appointment with one of their advisors. If you’re a more experienced investor, you can begin by initiating the signup online.

But before you take that big step and buy into these mutual funds, remember these steps:

1. Work out your budget.

Make sure to have the minimum investment ready. If that's over your budget, invest what you can afford and start there.

2. Pick an Active or Passive strategy.

You can choose to have your BMO mutual fund actively or passively managed. But for lower risks and reduced costs, remember that passive investing is best.

3. Know what you’re paying.

It's your obligation to read the fine print and the fund fact book. Find out what kind of fees a fund charges and how much they cost.

4. Grow and maintain the portfolio.

To make your long-term investment get the highest earnings, keep a keen eye on the fund’s performance. Be sure to rebalance the mix of assets at least once a year so your portfolio stays diversified and stays within your risk tolerance.

For a refresher on investing, read our guide on mutual funds.

There may be some changes to BMO mutual funds as a matter of policy, market fluctuations or movements in the industry. Many changes may have occurred even as of this writing, so it is the investor’s responsibility to do their homework and stay updated.

There are many reasons to consider investing in BMO mutual funds. For one, it’s from a Big Five bank and has a long history of reliability and stability.

The only sticking point may be the relatively high MERs, but a well-managed and diversified portfolio can compensate for this along with the associated risk.

Ultimately, investing in mutual funds from BMO boils down to the investor’s goals, budget, and risk appetite.

After knowing about the BMO mutual fund, will you include this in your investment portfolio? Let us know in the comments!