A mutual fund is a corporation or trust which accepts money from public investors and employs a professional investment manager to place that money in investments that will meet the fund's objective. A fund therefore is simply a cooperative means for many people to pool their savings together and have their investment professionally managed in the type of investment they choose. This pooled concept is one that allows numerous investors to put relatively small amounts of money into investments. But those many small sums add to a large amount of available dollars with which the fund manager can choose and diversify the investments represented in a specific fund. The investment fund also offers not only professional money management, but provides full administrative and accounting services for the investor.

It's impossible to compare funds "across the board". Mutual funds not only differ in their financial objectives but also invest in different kind of securities that reflect the ultimate objective of the fund. Thus, depending on the securities the fund is investing in, or the mix of securities chosen for a specific fund, the element of 'risk' varies substantially. The fund's objective is what the fund seeks to achieve by investing. This will determine what kind of securities the fund will buy, and in what economic sectors or countries.
You can see, therefore, that the amount of risk involved is directly related to the fund's objective. Generally speaking, it can be assumed that the higher the return, the higher the risk involved.
However, mutual funds remove much of the risk from investing because they are professionally managed by fund managers with many years experience in portfolio management. In addition, because of the 'pooled' concept inherent in funds, the element of risk is spread, thereby making funds less vulnerable to market fluctuations.
It should also be remembered that while it may be considered 'safe' to keep one's savings in cash, there is always the risk that inflation will, over time, erode the value of those savings.

Generally speaking, savings accounts are the means by which banks and trust companies borrow money from the public and lend it to companies and individuals at higher rates. The financial institution makes money on the spread or the difference between the rate it pays on savings accounts and the rate it charges borrowers. A money market mutual fund, for example, lends money directly to governments, corporations, and financial institutions and all people who invest through such funds earn the higher rate. There is no middleman.
The rates of return of return for "non-guaranteed" investments, such as common stock funds have, over time, historically been much superior to that of a savings account with a financial institution. This is because, in a free enterprise system investors who choose to "share" ownership of a public business by purchasing common shares are sharing in the fortunes of the business. If it does well they share profits - if it does badly there are little or no profits to share. They therefore expect, and get, a higher return for taking this risk. However, it must be borne in mind that the return on a common stock fund would not necessarily be consistent from year to year as companies do better in some periods than others.

Before specifically answering this question it should be clearly understood that one should only compare funds of similar types to get an accurate picture of relative performances. You cannot compare the rates of return between different types or categories of funds - you have to compare apples to apples, oranges to oranges. For example, it is pointless to compare the results of a fund that invests in oil and gas exploration companies with one that invests in well-established companies. The risks are quite different, as are the possible returns on the investments.
Fortunately, the financial press regularly report the performance of Canadian mutual funds by type. These reports contain average results over a 1, 3, 5 or 10-year period and are categorized by the investment objective of the fund. This makes it very simple for the investor who is considering, say, a growth fund, to compare all similar funds.

Most funds have their shares or units valued daily. This means that investors may purchase shares or units on any business day, and in most cases, may redeem or sell those units or shares back to the fund on any business day

Funds are suitable for retired people provided there is careful selection of the fund's investment objectives. A conservative approach to the preservation of capital may be desirable as one reaches more mature years. There may also be increased emphasis on the income needed for retirement. Funds can provide the means to reach both these objectives.

Basically, all funds charge a management fee, which is a percentage of the value of the assets of the fund. On average it is an annual percentage of between 1 and 2 percent. There are also the expenses of administering the fund, which are typically charged to the fund. Together these form the management expense ratio of the fund. In addition, there may be sales commissions charged on the purchase or redemption of shares, which are paid to the distributing agency. Remember that commission is paid for the value-added service of investment planning provided by salespeople. The amount of commission will depend upon the size of the purchase. If you understand investment, risk factors and tax considerations, funds without sales commissions (no-load funds) may be investigated.

Segregated funds are investment funds offered by insurance companies. Segregated funds, like mutual funds, pool investors' money together, under the direction of a team of professional investment managers to achieve growth. They are insurance contracts that offer the potential for growth with benefits such as probate protection, the potential for creditor protection* and capital guarantee.

Consider the benefits that a Death Benefit Guarantee and Maturity Guarantee could bring to your financial security plan. Think what Estate Planning and potential creditor protection features could do for your family and business.

Segregated funds, like mutual funds, have been available to Canadian investors for many decades. The variety and range of both increased dramatically during the late 1990s as more and more investors looked for better returns than those available from traditional savings instruments. Mutual funds and segregated funds are similar in some ways: Both pool the funds of many individual investors;and both provide investment returns based on the market values of securities held within their portfolios. In fact, some people consider segregated funds as mutual funds with insurance wrappers or the insurance industry's mutual fund equivalent.

However, investors should be aware of some basic differences between the two investments. Each mutual fund sells and buys back securities at the value of the assets held in the fund (net asset value). The mutual fund's assets are owned by the specific mutual fund. Investors own the mutual fund through units or shares of the fund.
In contrast, each segregated fund is a pool of assets owned by an insurance company. Each pool of assets is kept separate or "segregated" from other assets owned or managed by that insurance company. Investors do not own units of a segregated fund. Rather, they buy an insurance contract called a Deferred Annuity Contract (DAC) which offers them the opportunity to buy one or more segregated funds. The segregated fund investor doesn't buy units of the fund. He pays premiums to the insurance company based on the value of the segregated fund when he is buying. He also doesn't sell units of his fund. Instead the insurance company returns his premiums based on the value of the investments in the segregated fund. The end result is the same for an investor in a segregated fund or mutual fund: They get liquidity when they require it. Segregated funds policies have features that are not available in mutual funds.

*Creditor protection depends on court decisions and applicable legislation and can be subject to change and can vary from each province; it can never be guaranteed. Clients should talk to their lawyer to find out more about the potential for creditor protection for their specific situation.

Segregated fund policies protect part or all of your capital investment. In the event of the death of the last annuitant of a plan, the beneficiary is guaranteed to receive the greater of the market value of his fund or the death benefit guarantee as indicated in their policy. Generally 75% or 100% of his premium contribution, less any withdrawals made from the plan. This means that if the segregated fund value had dropped below the total value of all the premium contributions, the beneficiary is guaranteed to receive the amount specified in the death benefit reduced proportionately by any withdrawals.

Segregated fund policies provide principal guarantees of 75% to 100%, which are generally effective five, ten or more years after the date you contribute to your principal. This allows you to more effectively plan for your retirement, as you know the maximum downside of your investment at maturity date.

*Features and guarantees vary by policy and age of annuitant and some limitations apply. Maturity and death benefit guarantees are reduced proportionately by withdrawals.

Segregated funds offer protection for you and your family. Proceeds are paid directly to your beneficiary upon death, which means the proceeds bypass the estate. This means your family can avoid the delays and expenses of the probate process. It also means that your estate passes to your heirnamed beneficiary without becoming public record.

Small business owners take calculated risks every day, but they should not take risks when it comes to their personal savings. By investing in segregated funds, you may shelter your personal savings from creditors. This means, creditors may not be able to seize your personal savings in the unfortunate event that your business fails. Segregated funds may help you to protect your family's future and your own, by protecting your RRSP and other savings.

Investors should note the costs involved in obtaining these added features. At the present time, management expense ratios (MERs) of segregated funds are generally higher than comparable mutual funds. The cost of the maturity guarantee and death benefit guarantee can add about 25% to 80% basis points (100 basis points is one percentage point).
*Creditor protection depends on court decisions and applicable legislation and can be subject to change and can vary from each province; it can never be guaranteed. Clients should talk to their lawyer to find out more about the potential for creditor protection for their specific situation.

With most securities, such as mutual funds, stocks and bonds, investors report on their tax returns the income from their investments as shown on the T3 or T5 slips they receive from the broker or issuer. They also report the capital gains distributed to them by the mutual fund trust or corporation as shown on the T3 and T5 slips. However, when they sell or otherwise dispose of the security, they must calculate the capital gain or loss themselves by subtracting the adjusted cost base (ACB) of the security (as well as any outlays or expenses they incurred when disposing of the security) from the proceeds of the disposition and report the result on their tax return.
For mutual fund units or shares, this requires the investor to refer to the periodic reporting they receive from their broker or mutual fund issuer to obtain the required information since, generally, no tax slip is issued for this amount.
By contrast, issuers of segregated fund policies report both the capital gains and losses made by the fund, and the capital gain or loss resulting from most dispositions on the T3 slip. This reporting has a number of benefits. For example, the policyholder usually doesn’t have to track the ACB or calculate the gain or loss on disposition, which reduces the risk that the client will forget to report the capital gain or loss.
A description of the key features of the segregated fund policy is contained in the information folder.
Any amount that is allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.

If you would you like to ensure that a dependant continues to receive payments after you pass away or if you would you like a safe and steady income for the rest of your life. A payout annuity can create your own retirement income.
The payments you receive are made up of interest and principal and are determined based on:

• Your age (and in certain cases your spouse's age)
• Current interest rates
• Length of time the payments are guaranteed
• Amount of money used to purchase the annuity

Normally, payments are fixed, but if you are concerned about inflation, you may choose to have your annuity payments increased by a fixed percentage each year.

With Guaranteed Interest Options (GIOs), the rate of return is guaranteed for the term of the investment, so you don't need to worry about how market fluctuations might affect your investment. Non-redeemable GIOs cannot be cashed before their maturity date, but they generally yield a higher return because they are locked in. You can also purchase non-redeemable GIOs in U.S. dollars. Although these GIOs are non-redeemable they can sometimes be bought or sold on the open market. Redeemable GIOs can be cashed at any time. While flexibility is an attractive feature, especially if you need money in an emergency, redeemable GIOs pay a lower rate of interest than non-redeemable GIOs and usually an even lower rate is paid if you decide to redeem them before maturity. A Cashable GIO is a special type of redeemable GIO that has no penalty for early redemption. Some are one-year term investments that can be cashed any time after 30 days with full interest. With the benefit of not being locked in, you have the flexibility to handle unforeseen financial emergencies or take advantage of sudden investment opportunities as they arise.

There are different kinds of investment income, and different tax rules for each. It's worthwhile to consider the kind of income you'll earn when you devise your investment strategy outside a registered plan. Investment income breaks down into three basic categories:

Dividends are basically a distribution of a corporation's profits to its shareholders. Dividends paid by Canadian companies are eligible for the Dividend Tax Credit and attract less tax than other types of investments. With mutual funds, Canadian dividends earned by the fund are distributed to the fund's unitholders and they enjoy the same tax advantages as dividends paid directly to the company's shareholders.

Anytime you sell a capital asset whose price has increased from its purchase price, you generate a capital gain. Capital assets include things such as stocks, real estate and mutual funds.
If you own equity mutual funds, you may find that they generate capital gains every year, even if you don't sell your units. This is because activity within the fund may require that a capital gain distribution be made. Regardless of how you earn it, a capital gain receives tax-advantaged treatment, as only fifty per cent of the net annual gain is added to your income and taxed. The capital gains tax is calculated based on the difference between the adjusted cost base (ACB) and the fair market value. The value is then taxed at your marginal tax rate.
On death your capital assets are deemed disposed of at fair market value. There are exceptions where some of these assets are passed to a spouse or farm property to children. There is also a cumulative lifetime capital gains exemption that relates to gross gain (not taxable portion) of $750,000 on sale of a qualified farm property and qualified shares in a small business corporation.

There are several provisions in the Income Tax Act which allow you to transfer capital property, and in fact most types of property, on a tax-deferred "rollover" basis. A rollover means that no tax is payable as a result of the transfer. Generally, you are deemed to have disposed of the property on a rollover at its cost, and the transferee inherits the cost, so that any accrued gain may be taxed when the transferee ultimately sells the property.
Rollovers are available on transfers of capital property to spouses. Therefore, you can transfer any capital property to your spouse without immediate tax consequences.

Interest income is simply added to your income and taxed at your marginal tax rate. Within your mutual fund portfolio, your fixed-income funds are most likely to pay interest. Because there are no tax breaks on interest income, you may want to minimize the interest-earning investments you have outside your tax-advantaged registered plan.
Your investment decisions should be based on your risk tolerance and financial goals, not income tax goals alone. But you can make sure you take the tax treatment of your investments into consideration and take advantage of that knowledge.

Retirement Income - Taxation

Registered Retirement Income Funds (RRIF), Life Income Funds (LIF) and Registered Annuities

There is no minimum age restriction as to when the retirement income may commence, unless the funds are locked-in pension funds, in which case provincial pension legislation sets the minimum age at 55. For RRIF, a minimum income must be paid each year to the annuitant and included in the annuitant's income for tax purposes. The annuitant may withdraw more than the minimum RRIF amount. The total amount of income received from the RRIF is taxable in the year the income is paid.

Calculating Minimum RRIF Income

Effective January 1, 1993, the minimum RRIF income is calculated based on the following schedule.

Age on January 1	Percent of RRIF balance on January 1 that must be paid as minimum RRIF income this year
69	4.76%
70	5.00%
71	7.38%
72	7.48%
73	7.59%
74	7.71%
75	7.85%
76	7.99%
77	8.15%
78	8.33%
79	8.53%
80	8.75%
81	8.99%
82	9.27%
83	9.58%
84	9.93%
85	10.33%
86	10.79%
87	11.33%
88	11.96%
89	12.71%
90	13.62%
91	14.73%
92	16.12%
93	17.92%
94 or Older	20.00%

If a RRIF is taken out prior to age 69, the minimum RRIF income in the years prior to age 69 is calculated:

(RRIF balance on January 1) ÷ (90 - age on January 1)

The minimum RRIF income may be based on the spouse's age, if elected before the RRIF payments commence. In the year the RRIF is purchased, there is no minimum RRIF income because the balance of the RRIF on January 1, is nil. All RRIF income received in the year of purchase would be subject to withholding tax at source. Since a LIF is like a restricted RRIF, a LIF receives exactly the same tax treatment as RRIF for minimum payments but there is also a maximum payment constraint imposed by pension legislation.

With a spousal RRSP, one spouse contributes to a plan of which their spouse is the annuitant/owner. The contributing spouse will claim the tax deduction for his or her contributions, but when the RRSP matures, the other spouse will claim the retirement income the plan provides. Normally, amounts received from a RRIF or registered annuity are taxable to the annuitant. However, where the RRIF or annuity is purchased with funds from a spousal RRSP, the spouse who had originally made the contributions will, under certain circumstances be taxed instead of the annuitant spouse. These "attribution rules" are intended to prevent married couples from using spousal RRSPs purely as an income splitting scheme.
If the contributing spouse has made a contribution to any spousal RRSP in the current year or the previous two calendar years, the attribution rules apply if the annuitant spouse:

• makes a cash withdrawal from a spousal RRSP
• receives funds from a commutable annuity, if purchased with funds from a spousal RRSP, or
• receives an income from a registered retirement income fund (RRIF) in excess of the minimum for the year, if the RRIF had been purchased with funds from a spousal RRSP.

Generally, the fair market value of the RRIF, LIF or the commuted value of the registered annuity as of the date of death is included on the annuitant's final tax return and taxed accordingly.
If a surviving spouse is named as beneficiary to receive the RRIF or LIF balance in a lump-sum, that amount is taxable to the surviving spouse. The portion of the lump-sum which exceeds the minimum RRIF/LIF payment for the year may be transferred directly by the surviving spouse to his or her own RRIF, registered annuity, or (if under age 70) to a RRSP.
If a financially dependent child or grandchild is named beneficiary of the registered annuity, RRIF or LIF whether there is also a surviving spouse or not , the commuted value may be included in the dependent's income rather than on the deceased's final tax return. The dependent (or his/her legal representative) will be able to defer tax on this income only to the extent that the amount is used to purchase an annuity for a term of years not exceeding 18 minus the age of the dependent at the time the annuity is acquired.
The commuted value of the registered annuity, RRIF or LIF can be transferred to the financially dependent child's or grandchild's own RRSP if the recipient is dependent by reason of physical or mental infirmity.

If the owner is age 65 or older, retirement income from a registered annuity, RRIF or LIF, and the taxable portion of non-registered annuities, including guaranteed interest option, is treated as eligible pension income for purposes of the pension income tax credit. A person under age 65 will only be able to claim the tax credit on these sources of income if they are received as a consequence of death (e.g. surviving spouse on a joint registered annuity). The Federal pension tax credit is 15% of the first $2,000 of eligible pension income received in the year. Provincial pension income credits differ by province. In 2009 in Ontario, the maximum amount was $1,228 at a tax credit rate of 6.05 per cent, resulting in a federal and provincial combined tax savings of about $374.
The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of December 2010. Future changes to tax legislation and interpretations may affect this information. This information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate legal, accounting or tax advisor.