Mutual funds have been getting a bad rap lately with their high fees, low disclosure and under-performance. The introduction of ETFs has given investors a lower cost alternative.
Even David Chilton did an about face in his new book The Wealthy Barber Returns recommending ETFs instead of mutual funds.
It is true that the mutual fund industry is losing market share to ETFs but they still have $871.1 billion in assets under management (according to Investment Funds Institute of Canada – IFIC), and net sales of $5.41 billion so they are obviously part of many portfolios.
Who would benefit the most from holding mutual funds?
New investors and small investors
For someone just starting to invest and only able to contribute small amounts each month, mutual funds are a good choice. You can start an automatic purchase plan for as little as $25 per deposit.
Related: How To Start Investing Your Money
New investors are often quite conservative and afraid of losing their money.
With this fear of risk it’s easy to be talked into buying mutual funds; holding money market instruments, fixed income and even the popular balanced funds.
However, with today’s low interest rates, the fees will quickly eat into your returns so you’ll have little or no earnings. If you are this conservative it’s better to stick with a high interest savings account.
Otherwise, take the plunge and buy a low cost Canadian index fund. Take a look at the top 10 holdings and you’ll probably recognize the companies you’re about to have ownership in.
- TD Canadian index fund – e-Series MER 0.33%
- RBC Canadian Index fund – MER 0.72%
You can then branch out into a US Index fund, International Index fund and Bond Index fund to round things out.
Mutual funds are an ideal way to start building up a portfolio.
Convenience
All financial institutions offer mutual funds. What could be easier than walking into your branch and opening up an account immediately?
Contrary to popular opinion, bank advisors must successfully complete a securities related course before they are permitted to sell mutual funds, and often take regular in-house training courses.
Related: Why A Fiduciary Standard For Investment Advisors Is Needed In Canada
Yes, they will emphasize the positive benefits of their own funds but you don’t expect the sales staff at The Source to recommend a better deal for you at Best Buy. You need to do your own due diligence just as you would with any major consumer purchase.
One Globe 5-Star rated bank mutual fund is:
- BMO North American Dividend fund – 1-year return is 14.83%, and the return since inception is 6.52% per year.
Many people don’t want to set up a brokerage account. They may be too intimidated or just plain not interested in do-it-yourself investing with a discount brokerage, or not have the required minimum account size to use a full service brokerage or fee-based financial planner.
Mutual funds invest in a professionally managed pool of securities that provide instant diversification.
Check your banks website for fund information, or go to Globe Investor or Morningstar to compare bank and mutual fund company funds and rankings.
What about those fees?
Canadian mutual funds have the highest MERs in the world.
ETFs are more cost effective so you retain more of your earnings.
Of course, both of these statements are correct. Years ago mutual funds had strong returns so fees were not often an issue, but now, with lower expected returns, the fees are harder to justify.
Low cost investments look more attractive however, consider other variables besides MERs.
- ETFs are subject to a brokerage fee – up to $29 per trade. To be cost-effective you need a few thousand dollars for each transaction rather than small monthly purchases. (Note: Questrade recently announced that its clients can now buy any ETF in North America commission free)
- Registered plans (e.g. RRSP, RESP) held in a brokerage account charge an annual fee of up to $100 for accounts under their minimum required balances (often $50,000 to $100,000).
- Why are some people are happy with a cheap haircut from Magic Cuts while others will pay over $100 at a fancy salon. Some people will pay higher fees for the pleasure of dealing with their favourite advisor rather than doing their business by phone or online.
- Foreign and sector funds have higher MERs, but will give portfolio diversification not easily or inexpensively available in individual stock purchases. For example: Eleanor has a core portfolio of bonds and dividend stocks and receives about $50 a month in investment earnings. She decides to set up a monthly purchase plan into an emerging markets mutual fund. She realizes the MER is higher for this fund and recognizes it’s volatility but is willing to take the risk for this small amount.
- The majority of investors need advice and it’s necessary to pay a fair compensation to advisers and money managers for their services. For the mutual fund investor it is paid by management fees.
The Bottom Line
The bottom line is that you’ll pay some kind of fee for everything but fees should not be the sole, or even major, determining factor when making a purchase.
There are hundreds of investment choices to make and obviously not all are suitable for everyone or for every situation.
Related: Investors Getting Short Changed From Banks, Advisors
It’s important to strike the right balance to achieve your goals with the right products at the right time. Mutual funds may be just the ticket.
I’ve spent a few years dithering about what to do with my RRSP, but since my income has increased over that time I can no longer ignore the tax advantages of making RRSP contributions.
After only contributing $1,500 to my RRSP in 2011, I’ve added $5,000 in 2012 and another $5,100 during the first 60 days of this year. I’ve also budgeted to make another $10,000 in RRSP contributions during the remainder of 2013.
Related: RRSP Portfolio Update 2012
Here’s what I’ve done with my cash over the last 12 months.
- Bought 200 shares of Rogers Sugar on August 23rd, 2012
- Bought 250 shares of Rogers Sugar on November 30th, 2012
- Bought 100 shares of SNC-Lavalin on November 30th, 2012
- Bought 60 shares of Empire on January 10th, 2013
- Bought 30 shares of BMO on February 20th, 2013
I like to buy blue-chip companies that tend to increase their dividends on a regular basis. I believe these types of companies will deliver the highest returns over a long period of time.
RRSP Portfolio
Here’s a look at my RRSP portfolio as of March 22nd, 2013:
| Symbol | Shares | Market Value | Book Price | Current Price | Dividend |
| BMO |
90 |
$5,743.80 |
$55.95 |
$63.82 |
2.96 |
| BNS |
45 |
$2,674.35 |
$42.64 |
$59.43 |
2.40 |
| BCE |
80 |
$3,736.80 |
$24.52 |
$46.71 |
2.33 |
| CM |
32 |
$2,602.24 |
$60.29 |
$81.32 |
3.76 |
| COS |
140 |
$2,977.80 |
$20.71 |
$21.27 |
1.40 |
| EMP |
60 |
$3,891.00 |
$59.07 |
$64.85 |
0.93 |
| FTS |
100 |
$3,370.00 |
$29.28 |
$33.70 |
1.24 |
| GWO |
150 |
$4,075.50 |
$26.33 |
$27.17 |
1.23 |
| LIQ |
160 |
$2,964.80 |
$11.61 |
$18.53 |
1.08 |
| REI.UN |
130 |
$3,537.30 |
$12.88 |
$27.21 |
1.41 |
| RSI |
450 |
$2,857.50 |
$6.23 |
$6.35 |
0.36 |
| SNC |
100 |
$4,219.00 |
$39.39 |
$42.19 |
0.88 |
| SJR.B |
100 |
$2,484.00 |
$20.38 |
$24.84 |
1.02 |
| T |
85 |
$5,918.55 |
$31.74 |
$69.63 |
2.56 |
| TRP |
60 |
$2,974.20 |
$37.91 |
$49.57 |
1.84 |
| CASH |
$8,412.45 |
||||
| Total |
$62,439.29 |
This portfolio currently generates $2,278 in annual dividends. Only two of the 15 stocks failed to increase their dividend in the last 12 months (LIQ, GWO). Rogers Sugar paid out a special dividend of 36 cents per share earlier this year.
What To Buy?
I’m trying out a simple stock screener to find Graham-like Canadian dividend stocks to add to my watch list, but nothing has matched the criteria so far:
- Positive P/E Ratio less than 15
- Positive P/Book Ratio less than 1.5
- Dividend Yield more than 0%
- 1-Year Revenue more than $500 Million
- 5-year dividend growth rate more than 5%
- Dividend coverage between 5-95%
I’ve got a fair bit of cash sitting in my RRSP account so hopefully the market pulls back a bit so I don’t have to buy in at such a high value.
Related: The Pitfalls of Chasing the Highest Dividend Yield
What stocks are on your watch list right now?
The smart phone has been around for several years now and has matured significantly since the days of the original iPhone. Is it just me or does the market seem to be getting saturated?
The likes of Samsung, Apple, Google, Nokia and HTC are pumping out new models on a yearly basis. With all of these devices floating around out there, it was inevitable that a new product category would arise. Enter the smart watch.
As the name implies, this new gizmo would be more than just a watch. Imagine a mini smart phone that sits on your wrist that can be configured for various purposes and supports apps. According to ABI research, 485 million of smart watches could be sold by 2018.
Related: The Consumer Technology Upgrade Cycle – What You Need To Know
Smart Watches: Next Big Thing?
Though this gadget has been making a lot of headlines recently, smart watches have been around for awhile. The Nike Fuel Band has been on shelves for a few years and has some limited smart watch like characteristics.
Sony also has a smart watch that they released in 2012 which needs to be connected to an Android based phone. Their offering lets you check Twitter, the weather, read SMS messages and more. Reviews on the Sony offering are good but not great.
Another up and coming product is the Pebble, a very full featured, customizable watch. You can change the watch face (analog, digital), use it as a bike computer or even a golf range finder.
$150 for a mini computer on your wrist is probably not a bad price if you utilize all its capabilities. One of the best features is the ability to write code for Pebble and distribute it to the community. There’s nothing better than having an army of geeks writing apps for your product for free.
Related: How Mobile Technology Can Improve Your Health
While these initial offerings may be good, they’ll need to watch out (pun intended) for tech giants like Apple and Samsung.
Apple has long been rumoured to be making a smart watch and Samsung just came out and said they are making one too.
Hopefully a new product or two like the smart watch and an Apple TV will turn Apple’s stock around after its tumble in recent months. Note: I am an Apple shareholder though I sold 50% of my shares when the stock was trading at $660.
While a smart watch may be the next big thing in tech gadgetry I think we need to dial down the hype a little bit.
How many of you remember the old Casio calculator watch? How many people did you know that wore one of these things? Sure you could use it to figure out the tip on a restaurant bill but this type of watch was lacking one major thing, the cool factor.
Watches are meant to be cool
For many people, a watch is far more than just a clock on your wrist. A watch is a fashion statement, a piece of jewellery or even a symbol of success.
A computer on your wrist does not embody these things.
Related: What Will Our World Look Like In 2050?
We have an expectation that watches should be durable and last a very long time. With the pace of change in technology, we could see new smart watches getting pumped out every couple of years. This runs contrary to the whole experience of owning a watch.
While I’m sure many tech or outdoor enthusiasts will pick one of these up, I’m not sure the mainstream public will have the same reaction. There will be a market for smart watches but it will probably be more of a niche one than the broader smart phone market.
Would you wear a smart watch with a suit? Doubtfully. On a date? Probably not. In grade school? Perhaps, but your teachers probably wouldn’t be happy about it.
If the likes of Samsung and Apple can make smart watches really, really cool, the product will do well. Otherwise it will remain a niche item.
Remember, if you are already carrying one “smart” device, your phone, why would you need to carry another one? Owning two gadgets that have a lot of overlap in terms of features isn’t a good use of resources. The watch would have to offer a lot of different capabilities that your phone can’t.
Related: Gadget Insurance – Is It Worthwhile?
While I may be a bit skeptical on the perceived size of the market for high tech watches, I do see a big opportunity for companies if they can somehow produce a product that everyone wants.
Andrew Martin is a personal finance and investing blogger from Toronto, Ontario with a background in technology and a passion for travel. His blog, She Thinks I’m Cheap aims to help Canadians make more money by sharing facts, stories and advice.