How to Invest in Mutual Funds in Canada | Step-by-Step

Summary: This guide will present a detailed, step-by-step method for investing in mutual funds in Canada, delve into the pros and cons of investing in such funds, provide practical tips for a profitable investing experience, as well as our recommendation for the most suitable broker in Canada: Interactive Brokers. 

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What is a mutual fund?

Most mutual funds are actively managed, which involves one or more portfolio managers, supported by a team of analysts, making the decisions to purchase or sell securities. The main objective of a mutual fund is to identify investment opportunities that can enable the fund to surpass its benchmark, typically a broad market index such as the S&P 500.

A useful metric to gauge the effectiveness of a fund manager is by comparing the fund’s returns against this benchmark. While you might want to concentrate on short-term performance when assessing a fund, focus instead on long-term performance, such as returns over a 3-year or 5-year period. That said, remember that past performance is not indicative of future results.

How to buy mutual funds in Canada: Step-by-step 

One of the easiest ways of investing in mutual funds in Canada is through an online broker. To begin your investing journey, follow the steps outlined below. 

Step 1: Select a broker

Opening a brokerage account may seem intimidating, but it’s actually as straightforward as opening a bank account. When choosing a broker to invest in mutual funds in Canada, consider the following factors: 

• Fees: Brokerage fees, like maintenance or management fees, are costs levied by brokers to execute your trades. Examine the listed fees so you know what you’re getting into and can opt for a broker with the lowest costs;
• Security: Make sure the broker you opt for is fully regulated by the Canadian Investor Protection Fund (CIPF);
• Available products: Ensure the broker provides access to mutual funds, as well as any other assets you want to invest in;
• Convenience: A user-friendly platform with an easy-to-navigate interface is recommended if you’re new to investing. A section with investing tips and tricks might also come in handy. And if you like to keep an eye on your investments at all times, look for a platform that offers a mobile solution; 
• Access to market data: Go for a platform that offers access to reliable market research and reporting tools to help you invest confidently with updated data.

Where to buy mutual funds in Canada?

Our top recommendation for an online broker is IBKR. Loved by over 2.2 million users, it offers a variety of impressive features, including:

• 48,000 mutual funds available to clients worldwide;
• 19,000+ mutual funds with no transaction fees;
• Commission-free stock and ETF trading;
• Global stock-trading on 90+ market centers;
• Fractional shares;
• Earn extra income by lending your fully-paid shares of stock;
• Lowest financing rates for margin accounts in the industry;
• No account minimum. 

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• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

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Step 2: Pick the mutual fund

Here are some guidelines to help you choose a mutual fund:

• Type: Mutual funds come in various varieties like equity, bond, money market (short-term debt), hybrid, and more. Choose a category that aligns with your investment objective and risk profile;
• Fund performance: While past performance does not guarantee future results, it can give you an idea of how the fund has performed in different market conditions. Look at the fund’s long-term performance over 5 or 10 years rather than short-term results;
• Fund manager: Look at the track record of the fund manager. A competent fund manager can significantly impact the performance of the fund;
• Expense ratio: This is the cost of managing the fund expressed as a percentage of the fund’s assets. A lower expense ratio is generally preferable, as high costs can eat into your returns;
• Diversification: Funds that spread their investments across a wide range of sectors and companies can help to reduce risk;
• Consistency of returns: Some funds might have one or two outstanding years but underperform the rest of the time. Look for funds that have consistently good returns;
• Size of the fund: Larger funds have been around longer and may be more stable, but smaller funds may offer the chance for higher returns;
• Read the fund’s prospectus: This document contains information about the fund’s investment strategy, risks, performance history, and other important details;
• Reputation: A well-regarded fund with a proven track record can provide an added layer of confidence in your investment decision;
• Seek professional advice: If you’re unsure, consider consulting with a financial advisor who can help you select a fund that fits your needs and risk tolerance.

Step 3: Watch out for the fees

Overall, the expenses for actively managed funds, which aim to outperform average market returns, are typically higher than those for passively managed funds, which only seek to replicate the performance of a benchmark index, such as the S&P 500.

There are two types of fees a mutual fund charges you must consider when investing in mutual funds. 

1. Management expense ratio (MER): Ranging from 1-3%, this is the most significant ongoing expense you’ll incur. It covers the cost of managing the fund, including the salary of the fund manager and their team, research costs, office expenses, etc. The MER is usually expressed as a percentage of the fund’s total assets;
2. Shareholder fees, including: 

• Sales charges or load fees: These are commissions you pay when you buy (front-end load) or sell (back-end load) shares in the mutual fund. Some funds, known as no-load funds, do not charge sales fees.
• Redemption fees: These are fees that some funds charge when you sell your shares within a certain period after buying them, designed to discourage short-term trading.
• Exchange fees: If you transfer from one fund to another within the same fund family, the fund company might charge an exchange fee.
• Account fees: Some mutual funds charge fees for maintaining your account, especially if the balance falls below a certain amount.
• Purchase fees: Unlike front-end sales charges, these fees go directly to the fund to offset the costs of buying securities rather than to a broker.

Step 4: Place your order

Once you’ve chosen the mutual fund(s) you want to invest in, you’re set to place the order. Simply locate the ticker symbol of the mutual fund on your brokerage platform and specify the number of shares you wish to buy.

Note that the process for purchasing mutual funds differs from that of ETFs or individual stocks. Mutual fund transactions occur at a single point in the day after the market has closed, which means your purchase order might not be executed immediately.

This detail shouldn’t significantly impact you, given that by opting for mutual funds, you’re likely a long-term investor and not overly concerned with short-term market fluctuations. From this long-term investment viewpoint, the precise price paid on a daily basis is less crucial, as the value of the mutual fund is likely to rise over time from whatever price it is currently.

Step 5: Develop your portfolio

To reach your financial goals, you will likely need to keep investing over the course of years. The easiest way to do this is to employ a dollar-cost averaging technique, whereby you regularly invest a set dollar amount in mutual funds, irrespective of the market’s current performance. This approach results in buying fewer shares when the market is high and more when it’s low and can lead to a lower average cost per share of the mutual fund over time.

While the urge to observe your investments daily might be strong, particularly when you’re just starting out, most experts recommend a review every six to twelve months to ensure your asset allocation aligns with your goals. 

Pros and cons of investing in mutuals funds in Canada

Pros

• Ready-diversification: The primary benefit of investing in a mutual fund is achieving a diversified portfolio. You’re not relying on a single stock, so your entire investment isn’t at risk if one company’s stock plunges;
• Professional management: A mutual fund can respond quickly to evolving market conditions, allowing you to put your investments on autopilot and freeing you from constantly monitoring the market;
• Liquidity: Mutual fund shares can be bought or sold on any business day, providing relatively easy access to your money.

Cons

• Fees: Active fund management can be costly, and the associated fees are often high, reducing overall returns. Aside from management costs, you may also encounter “load” fees, which are essentially sales commissions you pay when you purchase a mutual fund;
• Underperformance: The reality is that many managed funds do not outperform their benchmarks. Indeed, you might be better off skipping the fees and investing in a broad market index fund.

Best Platform for Worldwide Stock Trading & Investing

• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Get Started

Should I invest in a mutual fund?

Typically, investing in the stock market involves a lot of complex tasks, including monitoring performance, analyzing company fundamentals, reviewing earning reports, and so forth. These tasks can be demanding, consuming significant time and effort. Investing in a mutual fund, however, will streamline that entire process. 

However, given that actively managed mutual funds necessitate daily oversight by professionals, an investment in such a fund may result in higher management costs and fees compared to a passively managed exchange-traded fund (ETF), which seeks to mirror a market index’s performance.

Indeed, unlike mutual funds, ETFs can be traded throughout the day, much like individual stocks, allowing for more flexibility, as they can also be sold short or purchased on margin. Many ETFs also have the added benefit of active options markets, offering investors the opportunity to hedge or leverage their positions. In short, ETFs tend to outperform mutual funds and are more cost-effective and liquid.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

FAQs about how to invest in mutual funds in Canada

Best Platform for Worldwide Stock Trading & Investing

• Highly trusted multi-asset broker with clients in over 200 countries

• Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

• Low commissions starting at $0 with no platform fees or account minimums

• Easily fund your account and trade assets in 26 currencies

• IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Get Started