The pandemic continues to push investors towards active management

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If the latest numbers from the Investment Funds Institute of Canada (IFIC) are any indication, the pandemic has created a resurgence in active management.

Investors who rushed to meet the March 1 Registered Retirement Savings Plan (RRSP) contribution deadline pumped nearly $10 billion into mutual funds in February alone, according to IFIC.

As of March 1, total mutual fund assets reached $2 trillion in Canada. Much of that came from an increase of $111.5 billion in mutual fund sales in 2021. That’s nearly four times the $29 billion in mutual fund sales in 2020, which which corresponds to average annual sales dating back to 2000.

By comparison, sales of passively managed exchange-traded funds (ETFs) totaled $4 billion in February, bringing total assets to $317.7 billion as of March 1.


BALANCED FUNDS LEAD THE WAY

More than half of February’s mutual fund sales went to balanced funds, which have been the funds of choice throughout the pandemic. As their name suggests, balanced funds attempt to strike a balance between equities and fixed income securities.

These funds are popular with novice investors because they mimic personal portfolios by offsetting stock market risk with the safety of fixed income securities. Since fixed income yields are close to zero, they also tend to dampen stock market gains. This is the price to pay for security.

Fees weigh more heavily on the returns of balanced funds. The annual management expense ratio (MER) varies by provider, but is generally around 2%.

Fees on segregated balanced funds, where the primary investment is insured, are generally 3%.

Most mutual fund providers offer Canadian or global balanced funds.


EQUITY FUNDS ONE SECOND

According to IFIC, equity mutual funds ranked just behind balanced funds in terms of new sales in February and total assets under management.

But while balanced funds are generally broad in scope, equity funds tend to focus on specific sectors or geographic regions. Global equity funds scour the world for stocks, while international equity funds exclude Canada and the United States.

Canadian and US equity funds tend to be staples in Canadian investment portfolios. but investors can diversify their holdings with funds that track specific geographic regions like China or specific sectors like technology.

Equity mutual fund fees are normally a bit higher than balanced fund fees because equity investments require more hands-on management.

COOL INVESTORS IN BOND FUNDS

As of March 1, $253.3 billion was invested in bond funds, which were the only major asset class to see a net redemption in February, with assets down $155 million, according to IFIC.

The only hard thing to understand is why investors would wait so long to exit bond funds. Low yields caused by low interest rates, combined with annual fees, have caused many bond funds to lose money.

Many investors are likely to confuse bond funds with bonds, which are held to maturity. It is also likely that some investment advisers see bond funds as the only alternative to fixed income securities that can generate fees for them.

Payback Time is personal finance columnist Dale Jackson’s weekly column on how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.


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