What are mutual funds? A guide for the beginner investor

^{Updated: May 15, 2025}  

If you’re new to investing, mutual funds can be a good starting point. They offer an efficient way to diversify your portfolio, with the benefit of professional managers making investment decisions on your behalf.  

But as a beginner, you might be wondering, “what are mutual funds?” In this guide, Wealth Professional will help you understand how mutual funds work, so you can decide if they’re a good fit for your investment goals.   

What are mutual funds and how do they work? 

A mutual fund is a combination of assets owned by a group of investors. A professional portfolio manager is in charge of making investment decisions, which are based on the fund’s investment goals. A mutual fund can focus on a particular investment type or a mix of asset classes, including stocks, bonds, and other securities.  

When you invest in a mutual fund, you pool money along with other investors. What happens is that you’re buying units, also called shares, which represent a portion of the fund’s value.  

There are two general categories of mutual funds: 

• closed-ended funds, which issue a set number of shares that trade on the open market 
• open-ended funds, which issue new shares as more people invest; most mutual funds operate this way 

The price per share of a mutual fund is called its net asset value (NAV). This is calculated by dividing the total value of the securities in the fund, minus total liabilities, by the number of outstanding shares. NAV is calculated at the end of each trading day. 

Here’s a sample calculation for a mutual fund with $200 million in total assets, $50 million in total liabilities, and 10 million outstanding shares:  

So, how will the money you invest in a mutual fund grow? There are also two ways:  

• capital gains, which you get if you sell your investments for more than you paid for; on the flipside, selling them for less results in a capital loss 

• distributions of dividends, interest, or other income that the fund earns; you often have the option to receive distributions in cash or have them reinvested in the mutual fund 

Check out this guide if you want to learn more about how to invest in mutual funds.  

Types of mutual funds 

In its mutual funds guide, the Canadian Securities Administrators (CSA) lists several types of assets that mutual funds commonly invest in. The table below summarizes how these investment work.  

 If you want to learn more about investing in some of the asset classes above, this guide on how to start investing can help.  

Mutual fund series letters 

You’ll notice that each mutual fund class or series is identified by a letter. These letters indicate the different fee structures, investment strategies, and trading approaches within a fund. They are intended to help you understand the different charges and where you’re buying the fund from. Depending on the letter designation, you may also need to meet different minimum investment and eligibility requirements. 

One caveat: there are no standards for using these designations. So, companies may use different letters to distinguish their funds. 

These are the commonly used letter designations in Canadian mutual funds: 

• Series A (Retail series): The most common class of mutual fund and typically has lower purchase limits; as the name implies, this is designed for retail investors 

• Series D (Discount series): This is intended for DIY investors buying mutual funds through discount brokerages; Series D mutual funds generally have lower management fees than retail series funds 

• Series F (Fee-based series): This is for investors with fee-based arrangements with their advisors; investors negotiate how much the fees are with their advisors and pay them directly 

• Series I (Institutional and high-net-worth series): Designed for institutional investors, this class of mutual funds come with high minimum investment requirements 

Some companies also offer mutual funds for special purposes. Some fund classes, for instance, are intended for investors who want to receive regular income with tax benefits.  

How are mutual funds managed? 

Portfolio managers decide when to buy and sell assets, keeping in mind the mutual fund’s investment goals and strategies. These are some of the common ways a fund manager handles an investment portfolio: 

• Active management: The manager trades assets, with the goal of outperforming the return of a specific benchmark or the overall market 

• Passive management: The manager buys a portfolio designed to track the performance of a specific index and adjusts accordingly based on this performance 

• Top-down approach: The manager searches for companies in specific sectors or regions with a potential to perform well and invests in these companies   

• Bottom-up approach: The manager invests in companies performing well, regardless of the prospects in their economy or industry 

• Combination of top-down and bottom-up strategies: The manager can use a top-down approach when searching for an industry or country, then builds up the portfolio using a bottom-up method 

• Technical analysis: The manager studies past market performance to predict the direction of investment prices 

Find out more about the different investment strategies in this guide on how to start trading.  

How are mutual funds taxed? 

Generally, you’ll need to pay taxes on any earnings you make on your mutual fund. These include dividends, capital gains, and interests. These are also taxable in the year you receive them. This is regardless of whether you receive cash or reinvest the earnings in the fund.  

One exception is if you hold the mutual funds in a registered plan, such as a: 

• registered retirement savings plan (RRSP)  
• registered retirement income fund (RRIF)  
• registered disability savings plan (RDSP) 
• registered education savings plan (RESP)  

Any money you make from the mutual fund is exempt from income tax as long as it stays in the plan. If you withdraw the money, however, this will be taxed as regular income.  

How to choose a mutual fund 

Choosing which fund to invest in can be difficult because of the countless options. However, there’s sufficient information available to help you make an informed decision. One of these sources is called Fund Facts. 

Fund Facts is a three- or four-page document that contains key details about a mutual fund. What makes this document useful, especially for new investors, is that the information there is presented in a way that’s easy to understand. You can get this document from company websites, or you can request a copy directly from the company.  

The CSA, as well as some provincial and territorial regulators, allow users to access an interactive fund facts sample through their websites. This is designed to help investors understand the key elements of the document and make sense of all the figures there. In this section, we’ll go over the different components of a fund facts document.  

1. Fund name 

Most mutual funds offer more than one series of securities as indicated in the fund’s name. These classes come with different features to help investors meet varying investment goals.  

  
2. Fund manager 

This shows the name of the company that directs the business, operations, and affairs of the fund. 

3. Portfolio manager 

This shows the name of the company that provides investment advice and portfolio management services to the fund. 

4. Top 10 investments 

This section lists the fund’s 10 largest investments with the percentage of net asset value. It also shows the total number of investments within the fund.  

5. Investment mix  

This provides a breakdown of the investment portfolio to give investors a clear picture of the fund’s exposure. The breakdown can be based on industry, asset classes, or region, depending on the type of mutual fund.  

6. Risk rating 

This section indicates the level of risk the fund is taking on. The ratings are based on market volatility and can change over time.  

7. No guarantees 

This is basically a reminder that just like other types of investments, mutual funds don’t provide any guarantees. Even funds with a low-risk rating can lose money.  

8. Fund performance 

This provides a summary of how the fund’s securities have performed over the past 10 years or from the fund’s start date if it’s less than 10 years old.  

9. Year-by-year returns 

This chart shows how the shares of the fund have performed in each of the past 10 years. 

10. Investor profile 

This describes the type of investors the mutual fund is suitable for.  

11. A word about taxes 

This contains a general description of how mutual funds are taxed.  

12. Fees and expenses 

This comprehensive section breaks down the various fees and expenses you will incur by investing in the mutual fund. This contains key details on sales charges, fund expenses, and other fees.  

13. Trailing commission 

Trailing commissions are ongoing charges for the advice and services provided by the fund manager. These are paid out of the fund’s management fees.  

14. What if I changed my mind? 

This section describes how to cancel and withdraw from an agreement to buy a mutual fund.   

15. Contact information 

This lists the fund manager’s contact details, including head office address, phone number, and email.  

What are the benefits of investing in mutual funds? 

Many investors find investing in mutual funds appealing because of these benefits: 

• Built-in diversification: Your money is spread over a variety of assets, helping to distribute risk and lessen the effects of a single investment's bad performance. 

• Professional management: Mutual funds are handled by experienced managers who are experts in investment selection and management.  

• Affordability: Because many mutual funds have low minimum investment requirement, they are easily accessible to a wide range of investors.  

• Liquidity: Mutual funds can be bought or sold on any business day, allowing you to access funds whenever you need to. 

• Oversight and regulation: Government agencies oversee mutual funds to promote accountability, safety for investors, and compliance with specific criteria. 

• Tax effectiveness: Certain mutual fund investments are tax-efficient, reducing the tax effect on returns on investments. 

Despite these advantages, it’s important to understand that mutual funds also have drawbacks. These include management fees and risks associated with market volatility. 

If you’re wondering what the best-performing mutual funds are right now, this guide provides a list.  

Is investing in mutual funds worth it? 

Mutual funds can make sense for a variety of individuals at various stages of their financial journey. These funds may invest in stocks, bonds, commodities, or an array of asset types. Whenever investing in a mutual fund, do your homework and ensure you understand the risk of the fund's assets. 

Before investing, consider the goals you have and willingness to take risks. It’s also best to consult with an experienced financial professional to determine whether mutual funds fit into your overall financial strategy. 

Did this guide make investing in mutual funds less intimidating? Let us know in the comments