Often people want to save money for their retirement but they do not know which the right vehicle to use is. The idea of putting all of one’s money into a bank has lost its appeal for many. Banks typically offer low rates of return on savings accounts, rates that barely keep up with inflation. Now there are an increasing variety of investment options, one of them being mutual funds.
Mutual offer investors the opportunity to participate in stock market funds without having to select or manage individual investments. And, they offer a potentially better rate of return than the banks do.
Basically, a mutual fund allows you to invest your money pooled together with other investors. A professional money manager uses their expertise in the marketplace to handle the ‘pool’ of money for you. They invest the pooled money in various companies within a variety of industries. Since most individuals do not have the time or training to manage their investments themselves, having a mutual fund professional money manager make investment decisions for them is a good way to go.
Being an investor of a mutual fund allows you to own shares in the companies proportionate to your investment amount. You can also receive a share of any earnings within that fund in the form of a dividend payment. The dividends are typically re-invested to automatically gain the advantage of compounding.
Because a mutual fund typically is formed around a number of companies, you as the investor have the advantage of diversification. That basically means that you have not ‘put all your eggs in one basket’. What that means is that your investment dollars are at less risk. If one of the companies within your mutual fund fails, it will not affect your investment as much as if you had only invested in the one company on the stock market.
With a mutual fund your money is always available for you to use should you need it. Your money is not locked in. You can withdraw your all of your money, or even just some of it, at any time by selling back your shares to the fund at the current net asset value.
Mutual funds can also allow you a tax advantage. If you register your mutual fund as a Registered Retirement Savings Plan (RRSP) you can defer paying taxes on your RRSP earnings. Your earnings are allowed to grow without being taxed and allow more of your money to compound and work harder for you.
Deferral means that you postpone paying the taxes on your investment amount until a future date. By deferring tax payment until your retirement, you will probably be in a lower tax bracket and will pay a lesser amount of taxes at that time.
You can also use your RRSP as a deduction on your current income taxes. You can use the amount you have put into your RRSP mutual fund and subtract it from your gross income before you calculate your income tax. The bigger your mutual fund investment, the less amount you pay taxes on (although there are some restrictions on the amount of deduction based on income).
Investing in mutual funds gives you the advantage of investing in the economy. Your investment risk is minimalized because of professional management and by the diversification that mutual funds offer. And, your potential for earning a higher rate of return than banks can offer is increased. That is why you would be wise to consider saving your money within a mutual fund.
