Group BCC FAQs

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2018 Guide to Government Benefits


Fund Types

Investments are classified under different fund types or categories. Knowing these will help you choose your investments.

Guaranteed funds earn a set rate of interest that is guaranteed for a specific term. You are also guaranteed a return of your capital (within set limitations). Guaranteed funds are low-risk and as a result usually earn a low rate of return.

Money market funds are mutual funds that invest primarily in short-term (under one year) government treasury bills and corporate notes. Money market funds are low risk and earn a fairly low rate of return.

Bond funds(also known as fixed income funds) are funds which are normally invested in bonds issued by governments, government subsidiaries and companies. As well as paying a rate of interest, some bonds held in these funds can have a “market value” which can rise and fall. While a bond fund can potentially pay higher returns than money market or guaranteed funds due to their market exposure, there’s an increased risk of loss.

Balanced funds (also known as diversified funds) invest in a mix of stocks, bonds, and cash investments. The investment manager will change the asset mix as market conditions change, but they usually stay within pre-determined ranges. Balanced funds provide automatic diversification by investing in a variety of asset classes (or fund types), which helps reduce risk if one type of fund performs poorly. These funds tend to be more risky than bond funds and less risky than pure equity funds.

Canadian equity funds invest primarily in stocks of Canadian companies. Since stocks may be expected to outperform other types of investments, they offer the greatest potential for long-term growth. However, these funds do have an increased level of risk for losses as a result of market fluctuations. With increased potential returns comes increased risk of loss.

Foreign equity funds invest primarily in stocks of companies incorporated outside of Canada and provide important diversification to investment portfolios. Investors spread their portfolio over the world market and reduce their overall investment risk. Foreign equities are exposed to risk related to currency fluctuations (i.e. the value of foreign currency relative to the Canadian dollar), and therefore carry a higher level of risk for loss due to currency fluctuations.

Asset Allocation Funds are usually part of a series (or program) of funds where each fund is appropriate for an investor with a different investment risk tolerance. Each one holds a different mix of stocks, bonds and cash, creating funds ranging from conservative to aggressive. Since they are slightly more complex to manage, they tend to have higher management fees than other investment funds.

Target date (lifecycle funds) are structured to coincide with a key life event such as retirement. Simply identify the date you’ll need your money and then pick the fund that matures closest to that date. The fund’s asset mix will shift automatically towards more conservative investments as the target maturity date of the fund approaches. Due to their complexity these funds may have higher management fees than other investment funds.

Investment Basics

Here are some standard investment terms that you’ll need to know:

Asset allocation: Diversifying your portfolio by asset class in order to lower risk and increase returns.

Asset class: Asset classes are a grouping of similar investments. The following are the different asset classes: stocks, bonds and cash.

Asset mix: Describes the proportion of an investment that is currently invested in each of the asset classes. the asset mix will be a contribution of assets typically in three different classes: stocks (also known as equities), bonds (a.k.a. – fixed income funds) and short-term investments (a.k.a. money market). For example, a fund might have an asset mix of 30 per cent Canadian equities, 30 per cent foreign equities and 40 per cent fixed income.

Compound interest: The money paid on both an investment as well as on the interest it earns.

Diversification: Spreading your investment risk by investing in different types of funds with varying levels of risk, thereby balancing your overall risk and increasing your potential for returns.

Dollar cost averaging: Helps minimize the effects of an investment’s volatility on your portfolio by buying units of the desired fund(s) in regular installments. The price of an investment will be higher in some months and lower in others so the average price you pay will be somewhere in the middle.

Risk tolerance: Is your comfort level with investment risk. You can’t avoid investment risk as there is risk with every investment. The general rule is: the greater the risk, the greater the potential for return. However, increased risk also means a potential for greater loss.

Investment Management Styles

Management style refers to the investment philosophy that managers apply when selecting sticks for their funds. Here are some common investment management styles:

Active fund managers rely on analytical research, forecasts, and their own judgment and expertise in making investments decisions on what securities to buy, hold and sell.

Growth fund managers invest companies experiencing a rapid growth in profits. Growth managers expect the rising earnings to drive stock prices higher, and therefore these managers focus on a company’s potential for further growth in earnings rather than the price paid for a company’s stock.

Growth at a reasonable price (GARP) managers look for the stocks of growth companies that they can buy for a reasonable price. This is a combination of value and growth investing.

Index/passive fund managers use passive investment style by simply buying and selling assets to match the characteristics of an index (e.g. S&P/TSX Composite). The performance of an index fund should be similar to the performance of the index. Because of their passive style, these funds tend to have lower management fees.

Value fund managers generally buy stocks of companies that they believe are undervalued by the market. These managers tend to buy low and then wait to sell high. Value managers focus on price of stocks rather than a company’s earnings.

What is CAPSA?

The Canadian Association of Pension Supervisory Authorities (CAPSA) is a national interjurisdictional association of pension supervisory authorities whose mission is to facilitate an efficient and effective pension regulatory system in Canada. It discusses pension regulatory issues of common interest and develops policies to further the simplification and harmonization of pension law across Canada.