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HomeMy WebLinkAboutThe Citizen, 2002-02-13, Page 9$$$$s$$$ ‘11 c:4 THE CITIZEN, WEDNESDAY, FEBRUARY 13, 2002. PAGE 9. 1 +k •t4 •-ib 4 . 'a <1 l"?n. 4 .4 INCOME $ TAX $ SERVICE • farm, business, or personal • complete year-round service including tax audit representation • E-File available Over 20 years experience Quality work at reasonable rates "FREE CONSULTATION" Stephen Thompson R. R. #2, Clinton 482-7551 You may also drop off or pick up your tax information at Black Creek Clothing, Queen St., Blyth RRSP LOANS at Prime - 1.5% ATTON & KLEIST INSURANCE & FINANCIAL SERVICES Pauline Atton, CFP & Karen Kleist CLU, C.H.F.C. 224 Josephine St., WINGHAM • 357-2669 1-877-860-9272 Fax 357-4070 DID YOU KNOW we think retirement should be fu n At Clinton Community Credit Union, we have trained investment professionals to help you save money for your future. RRSP loans at prime. Each RRSP is insured individually up to $100,000. Visit us to discuss how we can help you reach your financial goals. 48 Ontario St., Clinton A different way of banking.'" Tel. (519) 482-3466 Mon.-Thurs. 9 am-5 pm Fri. 9 am-8 pm 118 Main St. N., Exeter Tel. (519) 235-0640 Mon.-Thurs. 9 am-5 pm Fri. 9 am-8 pm www.clinton.on.cu Clinton Community Credit II Some answers to common RRSP questions The Investment Funds Institute of Canada, the national association of the Canadian investment funds industry, answers some commonly asked questions to help you figure out where to invest your RRSPs this year. There are almost two thousand funds available in Canada offering a broad range of investment objectives and investing in a variety of securities and in a variety of geographical locations suitable for almost all investment portfolios. Not all are eligible for investment in an RRSP, -however, many are eligible and you will find that there are plenty of options available for you. For example, there are funds that invest in Canadian common stocks, U.S. common stocks, and international common stocks. There are also funds that invest in the stocks of specific industries, such as natural resources or oil and gas stocks. Some funds invest only in gold or other precious commodities. There are dividend funds, which aim to maximize dividend income. In addition, there are bond funds and mortgage funds. There are also various types of money market or savings funds based on fixed income or guaranteed investment.. There are balanced funds, which balance their holdings between bonds and stocks, depending on how the manager perceives economic conditions at that time, and real estate funds that invest in real estate. Most of the funds available in Canada are open-end funds, meaning that they issue a continually increasing number of shares and subsequently purchase these shares back from investors on demand. How do the rates of return offered by mutual funds compare with those of savings accounts? 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. On the other hand, mutual funds, and for arguments sake let's consider a "guaranteed" money market mutual fund, lends money directly to governments, corporations, and financial institutions, and anyone who invests in a money market fund earns the higher rate of return. There is no intermediary responsible for establishing a "spread". The rates of return of return for "non-guaranteed" investments, such as common stock funds have historically been 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 is not necessarily consistent from year to year since companies do better during some periods than others. How can I compare the rates of return between different groups of funds? 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 performance. You cannot compare the rates of return between different types or categories of funds - you have to compare apples to apples, and 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 reports the performance of Canadian mutual funds by type. These reports contain average results over a one, three, five 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. Are mutual funds risky? 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. For example, a fund seeking the highest possible return on capital may invest in more speculative common stocks than one seeking maximum income from dividends. The risk in the first objective is much higher than in the second. 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 who have many years of experience in portfolio management. For example, in common stock funds, professional managers select the investments and monitor them carefully and frequently. In addition, because of the 'pooled' concept inherent in funds, the element of risk is dispersed 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. Are funds covered under the Canada Deposit Insurance Corporation (CDIC)? The CDIC insures the money a financial institution borrows from you in much the same way as you can insure repayment of your mortgage loan or consumer loan. When you invest in a fund, however, you actually own a piece of the fund's investments. It's more like owning a home or other asset you expect will fluctuate in value. There is no loan, or promise to repay it, that needs to be insured when you invest in a fund. Funds only promise to manage your investment, keep it safely while they have it and to pay you its value when you want it back. Mutual funds are a different type of investment vehicle to bank and trust company accounts covered by CDIC insurance. Fund managers and their funds operate under securities regulations, not banking or trust regulations. The assets of the funds are owned by the investors and held on their behalf by a custodian bank or trust company separate from the fund manager. For more information on these and answers to other common investing questions, visit IFIC's web site at www.ific.ca or contact IFIC at 888- 865-4342.