Banker's View : Why have Mutual Funds as part of your TFSA RRSP or RESP

What is a Mutual Funds?

I have explained what a mutual funds is in the previous blog. In a nut shell think of mutual funds as a basket of different products from different companies. Now, think of these products as shares of companies and bonds sitting in that basket. So its a mixture of different stocks and bonds (Diversified).

Why would you have mutual funds when nothing is guaranteed about them?

Why not put them in some thing like a Guaranteed Investment Certificate (GIC) where:

1. Your principle (money you invested)  is 100% secure 
2. The rate of return is 100%guaranteed. 

Here is my logic...

Lets say you go to your financial institution and open up a tax free savings account (TFSA) and through in a GIC in it. Lets say a 3 year rising rate GIC.

Year 1.             1.05%
Year 2,             2.1%
Year 3.             2.7%

On average you will get 2.1% from these three years {(1.05+2.1+2.7)/3}
Now lets say it has been 3 years since you invested and your GIC has come due(matured). With in these three year time period inflation was 2.87%.

What is inflation?
If you bought some thing for a $100 in 2012 , that same thing will cost you $102.87 in 2014 to buy. The price went up by 2.87%. In other words, in just two years time period your purchasing power went down -2.87%. Now you need that extra $2.87 to buy the same thing. Two bucks might not be a big amount but think about all the things that you buy thought out the whole year, it is MASSIVE!

Do not believe me...?

Check this out on Bank of Canada's web site...

Simple Math...

Your Return Minus Inflation

2.1% - 2.87% = -0.7% return for all those three hard working years.

Meaning, you got that same money back but it is not worth as much now. Your money actually went down in value....

Breaks my heart when every I explain this :(

What can you do?


Invest part of your money in investments that provide a higher return. You can open up a trading account with any of the brokers and start buying individual company share which could potentially provide a better return than a GIC. However, not every one has a CFA or the time to look in to a company and find out if it is a good decision to buy their stocks.

If you are some one who does not have enough time or the knowledge to do this, my recommendation is to invest in mutual funds.

Yes, as I mentioned before there is no guarantee of your principle and the return. However, some portion of you money sitting in a mutual fund is a good decision.

Just as an example of how a mutual fund portfolio looks like...

If you invested $1000 for example, 40% of that ( $ 400) will be in Fixed Income Funds (Bonds/Tbills and etc.)  24.4% sits in Canadian Equity Funds ( Canadian Companies) and the list goes on...





Will continue tomorrow...
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