Understanding Mutual Funds

Whether you’re investing on your own or working with a financial advisor, our TD Mutual Funds can help you lower costs, increase your return potential and achieve your investment goals.

A mutual fund is an investment vehicle where money collected from various investors is pooled together for the purpose of investing in different assets including stocks, bonds, money market investments like cash, gold, etc. These investments are all selected by a professional investment manager.

Generally, by investing in a number of different assets, a mutual fund can lower your risk because your money is not dependent on the performance of a single investment.

Types of Mutual Funds

Money market funds

Money market funds invest primarily in treasury bills and other high quality, low risk short-term investments. These types of funds help to provide stability and minimize risk, while delivering returns in the form of regular monthly distributions that are typically better than those of a traditional bank account. Investors may choose money market funds for their portfolio as a solution to help meet short-term goals or access funds in case of emergency.

Fixed income funds

By investing in fixed income securities such as mortgages, bonds and preferred shares, fixed income funds offer regular cash flow while preserving capital. These funds typically distribute interest income and provide potential for capital gains. Fixed income funds may also be used as a way to diversify an investment portfolio.

Our experienced fixed income team comprises over 80 fixed income investment professionals who collaborate closely to uncover true value and deliver optimal risk-adjusted returns, even in a period of low yields. The team continuously refines its approach and evolves its broad suite of solutions to help meet the changing needs of investors.

Balanced funds and portfolio solutions

Balanced funds hold a combination of equities, fixed income and money market investments. The portfolio manager adjusts the asset mix based on the objective of the fund and their view of the economy. Investors receive distributions in the form of interest, dividends and capital gains.

TDAM was among the first to introduce asset allocation portfolios. These “all-in-one” solutions are actively managed by our highly experienced investment team. The portfolios spread your capital among various asset classes, and then various types of investments within these asset classes. This way you can get the benefits of diversification—capturing the market’s upside while limiting the downside. There’s a broad selection to help meet your needs, whether your objective is retirement income, aggressive growth, or somewhere in between.

Equity funds

Equity funds invest in the stocks of public companies. These companies range in size from large to small, or both, and can be located in Canada only, the United States only, other specific countries or all countries. Equity funds may also focus on companies in certain sectors such as energy, gold or financials. These funds are ideal for investors looking for potential growth over the long term.

When it comes to the equity component of a diversified portfolio, we believe in owning high quality companies with solid balance sheets and strong financial performance. This focus on quality is what helps our clients confidently pursue their goals for growth. Additionally, TDAM solutions are collectively managed by an experienced equities team comprised of over 70 equity investment professionals with diverse backgrounds and skillsets. This approach consistently adds value to your needs.

Frequently Asked Questions

  • Distributions paid by mutual funds represent earnings generated by different types of investments held in the fund. As these investments earn income or are sold by the fund, the earnings are distributed in various ways. Depending on the source of the earnings, mutual fund distributions can have different tax implications and should be clearly understood for efficient tax planning.
  • Learn more with our informative distributions guide.

  • The Net Asset Value (also referred to as the Net Asset Value Per Share or NAVPS) of a mutual fund is the price at which the shares or units of a fund are traded. The NAV is obtained by dividing the total value of all securities (minus any liabilities) in the fund by the total number of shares or units that are outstanding.
  • For example, if the assets in a fund are valued at $10 million, the liabilities are worth $1 million and there are 1 million units issued, then:
  • NAV = ($10 million - $1 million)/1 million = $9

Risk and return are related because potential returns increase as the risk in an investment increases. Lower-risk investments tend to have lower returns, but the potential for losses also decreases.

Some assets, like fixed income investments, tend to be less volatile than other assets, like equities. An investor's risk tolerance and investment objectives determine the mix of assets in their investment portfolio.

There are a number of risks associated with investing in a mutual fund. These can include, but are not limited to:

  • Market risk - The value of a fund is dependent on risks that affect the entire market.
  • Liquidity risk - Liquidity risk is the possibility that a fund will not be able to convert its investments to cash when it needs to or will not be able to do so at a reasonable price.
  • Equity risk - When the economy is strong, the outlook for many companies will be good, and share prices will generally rise, as will the value of funds. On the other hand, share prices usually decline in times of general economic or industry downturn. In addition, the price of equity securities of certain companies or companies in a particular industry may fluctuate differently than the overall stock market because of changes in the outlook for those companies or the particular industry.
  • Credit risk - Credit risk includes the risk that the issuer of a fixed income security, like a bond, will be unable to repay their outstanding obligations.
  • Interest rate risk - Interest rate risk is the possibility that the interest rates are changed by the central bank. Typically, the value of fixed income securities rises when interest rates fall, and vice versa.
  • International market risk - Funds that invest in securities of foreign issues are subject to additional risks. For example, the value of investments in certain countries may be negatively affected due to geo-political events in the country or region.
  • Foreign currency risk - The value of an investment held by a fund will be affected by changes to the value of the currency in which the investment is denominated, relative to the base currency of the fund.

At TDAM, each fund is assigned a risk rating. This is based on how much the fund's returns have changed from year to year. It doesn't represent how volatile the fund will be in the future and the rating can change over time. A fund with a low risk rating can still lose money.

The Fund Facts and Prospectus are regulatory documents where you can find more information about each fund. Information in these documents includes:

  • Fund MER and total assets
  • Minimum investment amounts
  • Top 10 investments
  • Investment mix and asset allocation
  • Risk rating
  • Year-by-year returns, and best and worst 3-month returns
  • Sales charges, trailing commissions and other fees

Like market volatility, fluctuations in the value of the Canadian dollar can have an impact on the returns of mutual funds holding foreign securities, such as U.S. equities. For funds valued in Canadian dollars that hold U.S. securities (like stocks), Canadian dollars must be converted to U.S. dollars before buying the U.S. securities and converted back to Canadian dollars when selling the U.S. securities.

This creates an inverse relationship between Canadian currency fluctuations and the value of U.S. securities held by the fund.

When the Canadian dollar falls, the relative value of the U.S. securities rises. This adds to the fund's performance. On the other hand, if the Canadian dollar rises, the relative value of U.S. securities declines, which takes away from the fund's performance.

TD Asset Management Statement on Compliance with Executive Order 13959 "Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies"

Whether you're just starting to think about investing or have been invested in the markets for years, here are a few concepts to keep in mind.

Starting to think about investing

Getting started: Invest early and often

Investing should not happen just once. Regularly reviewing, contributing and sticking to your investment plan is typically the best way to help grow your wealth over time. Here are a few key reasons why investing sooner can make a big difference:

  • Purchasing power
    To maintain your power to purchase the same items in the future, your savings should generate returns that, at a minimum, can keep pace with inflation. Investing early can help.
  • Power of Compounding
    Compounding refers to the ability of an investment to generate earnings, which are then reinvested in order to generate their own earnings. This can make a huge difference in savings over the long term.
  • Market timing
    Many of the market’s most significant moves happen in short, unpredictable spurts. You could miss out on crucial gains, which typically come after dips in the market, by being on the sidelines for even a few days.
  • Long-term growth
    Negative events in the media may cause fear in investors who then stay on the sidelines at the expense of their long-term financial goals. Market volatility is normal and expected, but long-term growth can beat short-term fluctuations.

Making investments

Why diversification matters

Diversifying across a number of asset classes and geographic regions gives your investment portfolio a built-in ability to potentially benefit from each year's top performers, while seeking to reduce overall portfolio risk.

Diversification — the idea of not putting all of your eggs in one basket — works because asset classes have different qualities and tend to react to economic events in different ways. With a broad range of investments, chances are that when one area of your portfolio is falling in value, another may be rising.

As an example, following the steep and rapid market declines that occurred in the wake of the COVID-19 pandemic, most major asset classes achieved positive returns in 2020 and many indices went on to achieve all-time highs -giving credence to the stay-invested-for-the-long-term philosophy. Many investors could have recovered a majority of their 2020 losses in a relatively short period of time if they waited and remained invested in a diversified portfolio of equities and fixed income assets.

Investing for the long term

Moving in and out of the stock market — trying to predict the highs and lows —may cause you to miss out on potential long-term growth. History shows that investors who remain invested during the bear markets or challenging times, go on to benefit from the recovery period and the next bull market.

So what if you missed the top 1% of the best days over the last 30 years?

Find out learn more about The Power of Staying Invested.

Navigating market volatility and your emotions

Don't let the headlines keep you on the sidelines

Do you hesitate when it comes to investing? Maybe you feel that the time is not right. Perhaps you find the economy too unsettling or feel that current events suggest you should wait until things “settle down” or are more predictable. It's easy to understand why some investors become rattled during periods of significant market volatility.

Yet despite our emotions regarding the markets, ups and downs are a normal part of the journey. Historically, we can see that markets rebounded from negative factors impacting their performance, and eventually surpassed their previous highs. Indeed, investing for the long-term and staying focused on your goals is typically the best course of action.

Sometimes avoiding emotional decisions can start with a plan. If you’re looking to keep emotions out of your process, you could speak with an investment professional about developing a customized investment plan to help see the big picture, making it easier to identify your goals and stay on track.

Read more about The Risks of Emotional Investing.

Reaching retirement

Sequence of returns

Changes in the market are common. While no one can predict when volatility may strike, markets have historically bounced back over the long-term. For retirees, however, periods of high volatility can affect their savings if the sequence of returns they earn is unfavourable.

As you review your own approach to retirement, it’s important to understand the two stages—accumulation and decumulation—and how to improve your chances of maintaining your money.

Accumulation is the period where an investor saves and grows their nest egg. As they approach or reach retirement, an investor starts living off that nest egg during the decumulation phase. So while the accumulation phase is all about savings and returns, the decumulation phase is more about generating sustainable income. In short, it's a pivot to generating cash flow to avoid running out of money. And with the prospect of a long retirement, you might still need some growth in your portfolio.

An investor who does not have an immediate need for income can afford to wait out volatility, but a retiree who is in a decumulation phase – for example, a person who needs to make regular withdrawals – may experience a significant impact on their portfolios.

Here's an example. If a retiree is withdrawing 5 per cent of their savings per year, then their asset base will likely decline over time (depending on overall returns). So returns earned at the start of an investor's decumulation phase can affect a greater number of assets, setting the stage for the portfolio’s future income flow. On the other hand, the effects of investment returns in later stages of decumulation are not as pronounced, as they impact a smaller amount of assets. In short, avoiding negative returns early in retirement can be critical.

For more information, and to help ensure your investment plan will meet your retirement needs, have a conversation with your advisor.

A lot goes into building and managing a mutual fund portfolio. Understanding a fund’s Management Expense (MER) is a helpful way to see what it all costs, and the value you receive from professional investment management.

What it is, and how it works

  • A fund’s MER is its total annual expenses expressed as a percentage of its total asset value. For example, if a fund’s expenses added up to 2% of its assets, the MER would be 2%.
  • Your returns are reported after the MER is deducted and are typically reflected net of the MER. This means when you see your fund's return, you don't need to make an additional calculation to determine how much you have paid.
  • MERs vary, depending on the type of fund and how actively managed it is. Index funds generally have very low MERs as they usually seek to match a market index. Trying to outperform the index, however, requires the specialized expertise of a professional fund manager backed by a team of dedicated researchers and analysts.

MERs: Under the hood

The MER consists of the different costs associated with the fund. This includes portfolio management fees, operating costs and taxes.

Portfolio management fees
These cover investment research, securities trading, risk controls, and other activities that go into managing the mutual fund portfolio and keeping it on track. An actively managed fund tends to have a higher MER since holdings are individually researched, selected and monitored – as opposed to a 'passive' fund that tracks an index or benchmark.

Operating costs
These are associated with things like fund accounting, auditing and recordkeeping.

Trailer fees
The MER may include a trailer fee, which compensates your advisor for their advice and services. These services may include:

  • Identifying investment solutions to help you reach your financial goals
  • Helping to diversify your investments based on your risk tolerance
  • Recommending changes to your investment plan

Taxes
Mutual funds must include GST/HST in their fees.

Learn more about costs of investing and the value they provide on our mutual fund fees page.