Should I Use Mutual Funds In My RRIF?

mutual funds rrif
Mutual Funds in RRIFs

Mutual Funds in a RRIF

Mutual funds are one of the retirement investment options that many Canadians rely on. They offer a streamlined, low-cost way for you to enter the major exchanges. You outsource all the managerial work to a team of professional fund managers.

Before you invest in your own RRIF, it’s important to take the time to understand how your options work. So, let’s go over what mutual funds are and how they can benefit your RRIF.

What Are Mutual Funds?

Mutual funds are investment vehicles containing a diverse range of securities. Individual securities in a mutual fund can include stocks, bonds, equities, and other assets from various industries.

When you invest in a mutual fund, your investment is pooled alongside that of other people. Your money is combined and managed by professional mutual fund managers. You and the other investors share the risk, allowing for a greater diversity of securities. Any gains or losses are shared by all investors, proportional to the size of their investment.

One of the most attractive features that draw people to mutual funds is that they have one hard choice to make on the matter: which mutual fund to invest in. It’s up to you to look over the mutual funds offered by your broker and choose the one you find the most suitable. But after that, the fund’s managers make all the tough decisions and work to produce income through dividends and/or capital gains.

Mutual fund managers typically choose a strategy that is laid out in the fund’s prospectus. The prospectus is a detailed document that explains the decision-making process and mission behind the fund. Some managers will seek to maximize dividend payouts, while others will try to buy low and sell high.

The performance of a mutual fund is normally tracked by changes in its market cap. The market cap is just the total dollar value of all assets held in the fund. If the market cap consistently rises, the managers are doing their job well.

Investing in mutual funds is cheaper and faster than directly investing in all the fund’s securities. But you will have to pay a management fee for the services the managers provide. The management fee is typically a small percentage-based payment.

Benefits Of Mutual Funds In An RRIF

Tax-Sheltered Growth

Mutual fund investments allow your RRIF to grow even larger. You don’t have to pay taxes on the mutual fund’s gains, which is a great bonus if you’re aiming for long-term growth. Your taxes will be based on the amount you withdraw from your RRIF. So, you don’t have to worry about the taxes that come with non registered mutual fund investments.

Once you start withdrawing from your RRIF, you pay the usual income tax on your earnings.

Professional Management

Investing in mutual funds is easy. Of course, we recommend that you investigate mutual fund prospectuses before you make your choice. It’s also advisable to check on the fund’s performance. But when it comes to financial analysis and stressful decisions, professional managers will take care of you.

It is relatively easy to invest in a mutual fund. Your job is to make sure the management’s prospectus is a good fit for you. But what you get is a diverse and more risk-averse portfolio.

Mutual funds are strictly regulated for transparency. You will always know how your investment is doing as all you need to do is check with your broker.

Drawbacks Of Mutual Funds In A RRIF

No Voting Rights

You cannot vote on major decisions in a mutual fund. Unlike shareholders, you don’t actually have any ownership in the companies in which you are indirectly investing. That means you won’t be invited to shareholder conferences.

Costs

Mutual funds come with “expense ratios” attached. This ratio is the percentage you must pay for the fund’s management services.

You will need to factor your mutual fund’s expense ratio into your decision-making process. It will cut into your profits, so make sure you’re fine with what the fund charges investors.

In some cases, mutual funds will charge commissions. You can always find information on commissions and expense ratios in the prospectus.

Summary Benefits and Drawbacks

Advantages: Mutual Funds in a RRIF Disadvantages: Mutual Funds in a RRIF
Tax-Sheltered Growth No Voting Rights
Professional Management Cost

Should I Consider Adding Mutual Funds To My RRIF?

Mutual funds are a great investment vehicle to consider for your RRIF. The tax advantages you receive make the growth they produce worth it for you.

There are no guarantees when it comes to mutual funds. But you can invest in funds that track reliable indexes to reduce risk.

What to do now?

  • We supply you with the best Mutual Funds and other eligible investments in Canada as our brokers represent all the best financial institutions in Canada. For personal assistance on your Mutual Funds please use our Mutual Fund Form.

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