Mutual Funds – Page 6 – Adviceon Library

What is a Mutual Fund?

A mutual fund is a pool of investments managed by an investment firm using a variety of instruments such as stocks, bonds, or government securities. When one purchases shares of a mutual fund, the investment firm (not the individual investor) is responsible for the day-to-day investment activity of the securities within that fund.

There are many funds to choose from.

There are a variety of different types of mutual funds available today, ranging from balanced funds, bond funds, blue chips, small caps, foreign funds, and more. Each mutual fund is very different in its make-up and philosophy, for instance some funds own hundreds of different securities, while others may own only a few dozen.

Mutual fund companies do not guarantee returns and investors need to be aware that there is the potential for negative portfolio or market performance that can lead to the loss of money in mutual fund investments. An investor should look for funds with objectives and risk levels that match those of his/her financial strategy.

Using Mutual Funds in your Registered Education Savings Plan (RESP)

Mutual Funds allow the investor the same access to securities as the institutional investor—access to stocks and bonds from many different companies. Moreover, mutual fund investments can gain the tax-advantaged benefits if they are registered in one or more of several savings plans offered by the Canadian government.

Mutual funds area great way to diversify your Registered Education Savings Plan (RESP). You can start investing in mutual funds for your child’s education long before he or she reaches college or university age. Small monthly investments can add up over time to cover all or part of the following costs: tuition, books, accommodation, a cafeteria food plan or weekly groceries, a car payment plus insurance and gas or public transportation, furniture, a telephone, and of course spending money.

The Canda Education Savings Grant (CESG)

The bonus of the RESP is that the government actually grants you a percentage of your contribution. Thus both your contribution and the government’s grant are invested in the RESP. The added benefit of reinvesting the 20% government grant ¹ automatically in the mutual fund creates, even more, potential compounding. The RESP will grow tax-deferred until your student needs it. You can diversify among many types of funds which invest in companies of several international countries. For CESG information click here.

Mutual funds can enjoy tax deferral in the Tax-Free Savings Account (TFSA). The TFSA is a great investment if you are a member of a pension plan and have minimal if any, room to invest in your RRSP due to a high pension adjustment (PA) factor.

Educational Savings Use You can also supplement RESP savings through the TFSA. After-tax investments grow tax-deferred and there is no taxation on withdrawal. This makes the TFSA versatile for deferring investment taxation, plus avoid taxation upon withdrawing monies for numerous uses. However, the TFSA will not offer the benefit of the CESG.

¹ Check here for the limit on the CESG.

Source: CRA

Why is inflation a risk to my retirement income?

Statistics Canada releases inflation figures regularly to determine the health of the Canadian economy. Increasing inflation indicates that the economy’s overall prices are rising. On the upside, this means there is good economic growth pushing these numbers higher. Some inflation is necessary to a vigorous economy. Fast increases in the index percentile can spark the Bank of Canada to raise our interest rates to keep the costs of goods and services in check.

When you go to the pumps or to the grocery store, ask yourself, “will my retirement investment portfolio create sufficient income to pay for all these rising expenses?” Only by accumulating assets in your pre-retirement years, will you be able to increase your net worth, which can lead you to financial independence. The cost of our basic retirement needs will increase.

Investing to beat Inflation is a constant battle.

The importance of the economic fact of inflation may not be obvious. “What does the fish know about the water in which it swims?” asked Albert Einstein. Over the years, inflation has radically reduced our buying power. Interest rates when increasing as a policy to combat (reduce) inflation can also increase our debt repayment load as a percentage of income putting a strain on our budgets. In this respect, both inflation and interest on the debt are the foremost enemies of wealth creation.

How inflation is calculated Canada’s national statistics are weighted to reveal increases for the basket of goods and services in the Consumer Price Index (CPI).¹ Consumer spending patterns for 12 months up to October 2021, can be seen by visiting Statistics Canada.

Three of the eight major components saw unprecedented growth in their basket weights, the statistics agency said, led by shelter representing soaring house prices during the pandemic–the highest-weighted major component, which grew to 30% as a share of the basket. The share of the household operations, furnishings and equipment component grew to 15.21% and alcoholic beverages, tobacco products and recreational cannabis went up 4.86%. The Bank of Canada targets overall weighted inflation at 2%, with a 1%-3% control range. ²

You can get ahead of inflation now by investing. A healthy investment fund portfolio can give you a sense of financial security, earned by continued discipline and adherence to the principle of saving, which adds to our sense of personal dignity.

Saving on a month to month basis while purchasing investment fund units can help you realize your goals and objectives in life (such as acquiring a home, making major purchases, travelling, putting children through college or university, or going back to school yourself). Finally, your investments must outpace inflation—the rising cost of goods and services—the investor’s worst future enemy. Ask your financial specialist to do a complete analysis of your retirement income potential.

^{1 StatsCan}

^{2 Reuters}

How can I avoid Financial Internet Scams?

Online Identity theft is any Internet fraud that results in acquiring your data, such as unique Logins and Passwords, usernames, banking information, or credit card numbers. Moreover, it is theft of your financial identity!

How to avoid donation scams Be on guard if you receive an unsolicited email message from a charitable organization asking for money concerning a news event such as a natural disaster, a national election, or a significant change in the world financial system. Don’t open any attachments or click any links. Manually type the charity’s web address into your browser’s address bar and make sure the request is legitimate before donating.
Phoney links in email If you see a link in a suspicious email message, don’t click on it. These links might also lead you to .exe files, known to spread malicious software on your computer.
Fake Alerts and Threats Some thieves use threats that your Hotmail, Google, Facebook or bank account will be closed if you don’t respond to an email message? Internet criminals often use threats that your security has been compromised.
Spoofing popular websites or companies Scam artists use graphics in email that appear to be connected to legitimate websites like Facebook or your bank. How do they achieve this? Using fake logos to request your Login and Password, you are directed to phoney scam sites or legitimate-looking pop-up windows to ask for your financial information.
Fake web addresses Internet criminals also use slightly altered web addresses that resemble the names of well-known companies.
Lies about your computer software Internet criminals might call you on the phone and offer to help solve your unknown computer problems warning of viruses or speed-slow downs. They might try to sell you a software license or an agreement to assist you periodically. In most cases, neither Microsoft nor Apple make unsolicited phone calls to charge you for computer security or software fixes.

Source: Microsoft

Designating your charitable contributions

A charitable contribution is a gift, and, like any gift, is an irrevocable transfer of a donor’s entire interest in the donated cash or property. Hence the donor’s entire interest in the donated property is transferred, and it is for the most part (except for “designated” uses) impossible for the donor to recover the donated property.

Undesignated contributions Most charitable contributions are undesignated, meaning that the donor does not specify how the contribution is to be spent. An example would be a church member’s weekly contributions to a church’s general fund or a contribution to the United Way or World Vision. Undesignated contributions are unconditional gifts and there is absolutely no legal obligation to return undesignated contributions to a donor under any circumstances.

Designated contributions A donor can make a “designated” contribution to a charity, where the donor designates how the contribution is to be spent. Where such contributions are held in trust for a specific purpose, and insofar as the charity honors the designation, or plans to do so in the foreseeable future, it has no legal obligation to return a donor’s designated contribution.

Where designated contributions will not be used for the specified project, and donors can be identified, they should be asked if they want their contributions returned or retained by the charity and used for some other purpose. Ideally, donors should communicate their decision in writing to avoid any misunderstandings. Charities must provide donors with this option in order to avoid violating their legal duty to use “trust funds” only for the purposes specified.

A charity should send a letter to donors who request a refund of a prior designated contribution informing them that (1) there may be tax consequences, (2) they may want to consider filing an amended tax return to remove any claimed deduction, and (3) they should discuss the options with their tax advisor. Charities should consult with an tax attorney when deciding how to dispose of designated funds if the specified purpose has been abandoned or is no longer feasible.

What could I miss doing that could ruin my retirement?

Perhaps you haven’t started investing regularly, or the amount you allocate is not enough to reach your retirement goals. Here are a few of the things people are not doing that can ruin otherwise good investment goals.

Not viewing debt as negative investment earnings. If you are paying 18% interest on a credit card while earning 8% in an investment, that immediately places you in a 10% loss position per dollar compared. Moreover, where else can you get such a guarantee on your investment return, as you can by investing in your debt repayment? By paying off $5,000 over one year, you’ll earn $900 risk-free and you won’t have to pay that with after-tax dollars ever again.

Unsecured credit card debt can kill a once-healthy budget, while substantially reducing your income. And opportunities can suffer when your cash flow is crippled by debt. It is harder to solve the need for emergency cash if you are debt-ridden.

Especially look at paying down debts that carry interest that cannot be written off as you are paying for both the principal and the interest with after-tax dollars.

Not putting money away into an emergency fund. If an emergency arises you should be able to access a simple bank account to cover up to three to six months’ worth of living expenses such as your rent or mortgage, food, debt repayment, car payments, etc. Consider using a money market fund for this savings plan.

Not assessing your retirement time horizon. You can analyze what you will need to invest annually, by running calculations to see if you will have sufficient income to live on. Confer also with your advisor about how you can get there over your remaining employment years, by investing with a clear vision.

Not assessing the impact of inflation on your retirement income. Refer to this table to see how inflation can affect your retirement plan.

Planning for your dependants. Make sure you have sufficient life insurance to pay off your total debts such as: credit card balances, car loans, IOUs, and any business-related debt. Incorporate this with sufficient coverage to provide future income for your dependants. This is especially necessary if your debt exceeds your annual income as it does for the average Canadian household where debt runs at 150% of income. Source: The Vanier Institute of the Family, February 2011

How can I minimize the tax paid in my estate?

The need for estate planning is especially evident for those accumulating significant retirement wealth, either in the form of business ownership, real property or investment assets. Though it is true that “You can’t take it with you”; it is possible to reduce your estate taxes enabling you to transfer more money to your heirs. The estate tax is payable on income accrued to the date of death including salary, investment income or dividends.

The Income Tax Act deems that you dispose of all your capital assets, including stocks, bonds and mutual funds, at their fair market value just prior to your death. In the year of your death, gains that have accrued on your investments and other capital property will become taxable, reduced by accrued losses on investments and other capital properties. You will need professional tax advice when developing your estate plan.

Leaving Non-Registered Assets to Your Spouse

A surviving spouse can continue to benefit from your assets. You can defer tax payable on your accrued gains at death if you leave your assets to your surviving spouse or to a spousal trust established for the sole benefit of your spouse during his or her lifetime. The taxes are deferred until the death of your spouse or until he or she sells the assets. The deferral allows your spouse to utilize your investment assets in a tax-efficient manner and to dispose of assets in a way to minimize the taxation.

Leaving RRSPs and RRIFs to Your Spouse

Did you realize that your RRSPs and RRIFs would be subject to immediate tax upon your death unless you have established your spouse or a financially dependent child as your beneficiary, and certain other conditions are met? Tax will be payable when monies are withdrawn as income by your spouse or as annuity payments to financially dependent children. Even if you have not established your spouse as your beneficiary, he or she may be able to legally request a transfer of your RRSP/RRIF funds to his or her RRSP/RRIF and defer the tax that would otherwise be payable upon your death. Further, upon your spouse’s death, any remaining RRSP/RRIF money will be taxed (assuming there are no financially dependent children). Any RRSP/RRIF tax liability could optionally be paid using a special pre-designed life insurance strategy to help maintain your asset base and is transferable to heirs surviving your spouse.