A mutual fund trust (MFT) is a trust made up of various units. It must be managed and must prescribe to a specific set of guidelines that dictate the behavior of the mutual fund trust. The more common of these guidelines limit the number of units in the trust, the public trading of the trust, and how the trust is dispersed.
The rules by which the mutual fund trust is run are known collectively as trust law. These trust laws are typically a combination of local regulations and the guidelines under which the trust was established. These guidelines are commonly spelled out in the form of a deed. Those who run the mutual fund trust are called trustees and are legally and morally obligated to manage the mutual fund trust in a manner beneficial to its shareholders.
Most mutual fund trusts are also registered retirement savings plan (RRSP) eligible. An RRSP is exactly what it sounds like — a retirement plan that offers tax benefits to its shareholders. When a participant contributes to an RRSP, the investment is tax deductible. Another tax benefit of an RRSP mutual fund trust is that the investments accumulate at a pretax rate. The dividends are protected from such things as income or capital gains taxes.
There are several types of funds that can be considered an MFT. One of the more controversial is an exchange fund. An exchange fund is designed to allow a shareholder with a large amount of a specific stock to diversify. This diversification occurs when the shareholder swaps the large amount of a single stock for a unit made up of a group of several stocks. By not having to sell the single stock, there is often a significant savings in fees and penalties that are avoided in this swapping technique.
Another type of fund common in an MTF is an income fund. This type of fund is designed for the shareholder who wants to create income from the dividends of the stocks and has no intention of selling the stocks to generate financial gain. This type of fund is also commonly known as an equity fund.
A person should consider consulting a financial adviser before investing. The tax ramifications differ greatly depending on how an MFT is managed and what type of assets it holds. Not every type of investment is created equally. An expert can help determine what’s best for a specific situation.
