Should I Use Mutual Funds In My TFSA?

mutual funds tfsa
Mutual Funds in TFSAs

Mutual Funds in a TFSA

Many Canadians choose to put mutual funds into their TFSA. This allows them to see their investment portfolio grow tax-free.

If you’re not trying to actively manage your investments, mutual funds are a good 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.

Let’s quickly go over what mutual funds are, what they offer you, and why people choose them for their TFSAs

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 share all gains or losses the fund goes through.

Mutual fund managers make 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 TFSA

Tax-Sheltered Growth

A mutual fund offers you diversification and outsources decision-making to professionals. When you invest through a TFSA, it also means you won’t have to pay taxes on your gains.

Mutual fund investing isn’t free. But when you are taxed on your gains, it adds to the management fees you’re already paying. The result is normally a deep cut into your returns.

TFSAs are a smart way to avoid the costs of taxation.

Professional Management

You don’t need to do much work when you invest in mutual funds. It’s your responsibility to make sure a mutual fund’s assets and its management are the right fit for you. But beyond that, mutual fund managers make all the hard decisions.

If you’re wondering how your mutual fund is doing, you can always just check. Mutual funds are strictly regulated, and transparency is a given. You can look at your mutual fund’s market cap changes to see how much it’s doing for you.

Drawbacks Of Mutual Funds In A TFSA

Lack Of Decision-Making Power

Unlike owning shares, owning mutual funds doesn’t give you any power over the course of your investment. You cannot vote on major changes at a shareholder conference. So, your investment’s returns are dependent on the performance of the fund manager and the fund’s underlying securities.

Costs

The main expenses that a mutual fund investor has to pay are known as “expense ratios”. An expense ratio is a percentage you must pay for the fund’s management services. Of course, you need to factor these into your decision-making process because they will cut into your returns. In some cases, mutual funds also charge commissions.

Summary Benefits and Drawbacks

Advantages: Mutual Faunds in a TFSA Disadvantages: Mutual Funds in a TFSA
Tax-Sheltered Growth Lack Of Decision-Making Power
Professional Management Cost

Should I Consider Adding Mutual Funds To My TFSA?

Yes, you should consider mutual funds for your TFSA.

Mutual funds don’t come with guarantees of amazing returns. But they do normally produce meaningful growth. That also means a higher tax bill.

By investing in mutual funds through a TFSA, you are ensuring your growth comes without a high tax bill. You can invest in your future without having to sacrifice some of that growth to the CRA. This makes mutual fund investing through a TFSA a practical long-term saving strategy.

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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