Should I Use Mutual Funds In My RRSP?

mutual funds rrsp
Mutual Funds in RRSPs

Mutual Funds in a RRSP

Many Canadians choose to put mutual funds into their RRSP. If you talk about your RRSP to an advisor, they will likely bring up mutual funds.

If you’re not trying to actively manage your retirement funds, mutual funds are an option. They are often touted as offering a good balance between risk and returns. Because they are also managed by professional managers, they offer many Canadians the peace of mind they are looking for.

So, let’s look into why so many people choose to invest in mutual funds. We will also look at the pros and cons of investing in them for your RRSP.

What Are Mutual Funds?

Mutual funds are a pool of securities often including stocks, bonds, equities, and other assets. When you invest in them, your money is pooled together with the money other investors like you put in. The assets in the mutual fund are then managed by professional managers. Because the fund is a pool, investors all share all gains or losses the fund goes through.

Mutual fund managers make all the hard choices in a mutual fund. They allocate funds and try to produce either capital gains returns through buying low and selling high, or they try to produce income through dividends.

Each mutual fund has its own structure which is laid out in its prospectus. This document explains the parameters that management uses to make their decisions and what kind of returns they are working to produce.

Mutual funds usually contain a large variety of securities. This is done to reduce risks that arise from any single security dropping in value. The performance of a mutual fund is typically tracked using the market cap of the fund and the changes it sees. The market cap is the dollar value of all the investments inside the mutual fund.

As an investor in a mutual fund, your gains or losses are shared with a larger pool of investors. Apart from that, you will normally pay a small management fee to the fund’s manager in exchange for their services.

Benefits Of Mutual Funds In An RRSP

Lower Risk Than Direct Investments

For amateur investors who don’t have the time to thoroughly analyze every security, mutual funds offer less risk.

Professional managers will do all the work that you would normally need to do if you were directly investing. Mutual fund managers are full-time investors that work with larger institutions to create the best returns possible.

If you’re ever concerned about your mutual fund, you can simply look at its performance. Mutual funds follow strict regulations and provide complete transparency.

Who oversees Canada’s mutual fund industry?

Diversification

Mutual funds are, by definition, diverse. They hold different securities that may track an index or industry. But professional managers go through the work of diversifying the fund’s portfolio. So, by investing in a mutual fund you are investing in a diverse range of individual securities.

Variety

Every mutual fund will have a diverse range of securities. But you also have a lot of variety in the kinds of mutual funds you want to invest in.

Some mutual funds are based on growth investing. Others focus on emerging markets. You can even invest in mutual funds focused on commodities. The list is endless.

Drawbacks Of Mutual Funds In An RRSP

Lack Of Decision-Making Power

You have no say over individual management decisions in a mutual fund. You cannot vote on major decisions at a shareholder conference as you would if you owned a company’s stock. So, you lack a lot of control that you would be granted if you directly invested in stocks.

Costs

Your management fee, provided as an “expense ratio”, will cut into your payouts. In some cases, mutual funds also charge commissions.

Potentially Lower Returns

Mutual funds may be diverse, but they are sometimes overly complicated. Some managers will complicate the fund’s investments to the point that they won’t maximize returns for investors.

It’s possible that diversification, if done poorly or is too complex, will lower returns.

Summary Benefits and Drawbacks

Advantages: Mutual Faunds in a RRSP Disadvantages: Mutual Funds in a RRSP
Lower Risk Than Direct Investment Lack of Decision-Making Power
Diversification Costs
Variety Potentially Lower Returns

Should I Consider Adding Mutual Funds To My RRSP?

Mutual funds cut out a lot of the work you would need to do investing in the markets directly. But they come at a cost, which is sometimes as high as 2% or more per year. However, they also offer the potential for higher returns than you’d get from more passive and low-risk investments like GICs.

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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