Canadian Investments Funds Course

Transcription

1 Course Information Welcome to the Canadian Investment Funds course. Since this course was first offered in 1966, this course has served as the foundation for thousands of careers in the mutual fund industry. This course has a number of objectives, including the following: to make you aware of your duties and obligations as a mutual fund representative and of the regulations that govern your activities to provide you with an overview of the economic and investment framework in which the mutual fund industry operates to acquaint you with the structure of the mutual fund industry in Canada, and the administration of mutual fund organizations to illustrate the investment activities of mutual funds to provide a basic grounding in the Canadian income tax system, especially concerning the taxation of investment income to provide an overview of pensions and retirement savings To continue, click the Next button in the bottom, right corner of the screen. Course Overview Welcome to the IFSE Institute s Canadian Investment Funds Course. Throughout this course, learners will be given information and exercises that is relevant to their work as mutual fund representatives. The sequence of the instruction parallels the process that they will follow much of the time with clients. Our goal is not only to present the knowledge that they will need for the role but also to give them the opportunity to analyze case studies and put their knowledge into practice. Exam The final exam is a formal proctored exam consisting of 100 multiple choice questions. The exam is worth 100% of your grade. You will have 3 hours to complete it. You will be required to obtain a mark of 60% to pass. Who should take this course? The IFSE Canadian Investment Funds Course is ideal for: An individual looking to become a mutual fund salesperson Operations and back office staff Branch administrators Advisor assistants Exempt market dealers Anyone looking for a greater understanding of the mutual fund industry Using this Course If you are new to the online courses offered by IFSE Institute, we suggest that you begin by taking a short course called Learning on the Web. It shows you how to navigate, find the information you need, and use all the tools available online. It takes roughly 20 minutes to complete. To go to Learning on the Web now, click the Resources button at the top of your screen, then click Learning on the Web. Course Strategy Throughout the course you will be given information and exercises that are relevant to your work as a mutual fund representative. Each unit introduces activities and processes that you will use in 2010 IFSE Institute 1

2 serving your clients. Our goal is not only to present the knowledge that you will need, but also to give you the opportunity to analyze situations and put your knowledge into practice. You will be introduced to exercises and case studies that challenge you to provide the next step in a mutual fund solution for your clients. At the end of each unit you will have a more complete picture of this solution and greater expertise in solving client cases. By the end of the course you will have the foundations of what you need to know to be a mutual fund representative. How this Course is Organized In the next few pages, we will introduce the topics the course covers, illustrating how you will use them in client situations. To do that, here is the first case study: Don and Joyce Foley. The Foleys are typical Canadians. They have worked hard and have saved a tidy sum. They have always dealt with the bank regarding their investments, mostly investing in guaranteed income products. The Foleys have never had an interest in investing, but now they want to take charge of their finances. They started by attending a seminar given by a local mutual fund salesperson, Sylvia Terroni. Sylvia appeared knowledgeable and friendly. The Foleys made an appointment to meet with Sylvia. To see how Sylvia helps the Foleys, and to learn about the topics in the course, click Next. Unit 1: Financial Objectives In this unit, we will discuss the major institutions that regulate the securities industry. We will also delve into a discussion on the Know Your Client rule. The Know Your Client rule is the foundation of an advisor s relationship with a client. Within the unit, you will have an opportunity to practice obtaining Know Your Client information, perform analysis on the data, and begin to formulate solutions. When the Foleys meet with Sylvia, they begin by saying they want to buy mutual funds. Sylvia replies that she would be glad to help, but first, she needs to gather some information from them. Sylvia explains that she requires this information to understand their situation thoroughly and to make the appropriate recommendations. Sylvia completes a Know Your Client questionnaire that helps her obtain the information she needs to analyze the Foleys situation. During their meeting, Sylvia helps the Foleys identify their key financial objectives. Sylvia also ascertains the Foley s risk tolerance, financial resources, investment knowledge and experience, and time horizon. Unit 2: Mutual Fund Basics In this unit, we will discuss the history, benefits, and administration of mutual funds. We explain how fund prices are evaluated and discuss the fees involved in managing, purchasing, and redeeming mutual funds. Since the Foleys are new to mutual funds, Sylvia explains their benefits. The Foleys mention that they now understand why mutual funds are so popular. Sylvia also explains the purchase and redemption options available to the Foleys when they are ready to invest or when it s time to IFSE Institute

3 withdraw their funds for retirement. Before recommending any mutual fund, Sylvia discloses the associated fees and the value the Foleys will receive for their money. Unit 3: Mutual Fund Investments In this unit we outline the importance of investing and describe the sort of investments that are held in mutual fund portfolios. Mutual funds invest in a wide variety of securities including money market instruments, fixed-income products, common and preferred shares, and derivatives. The Foleys want to invest over the long term and take advantage of compounding growth. Don Foley believes this can be done by investing in certain oil and gas funds that have earned phenomenal returns in the last few years. Sylvia takes the time to explain the nature of the underlying investments in different mutual funds, and informs Don that the risk associated with those energy funds may not match the Foleys' risk tolerance. She recommends funds that hold a mix of money market instruments, fixed-income products, and equities. Unit 4: Types of Mutual Funds In this unit, we describe the various types of mutual funds and the relationship between risk and return. The higher the risk, the higher the potential return. In contrast, the lower the risk, the lower the potential return. Sylvia feels that it is part of her job to educate new clients about mutual funds. She starts by explaining the categories of funds: income, growth, and combination of income and growth. Then she moves on to explain each type. Sylvia has already begun to match the Foleys' investment objectives and risk level with the various mutual funds to find a solution. Unit 5: Economic Environment In this unit, we discuss the macroeconomic environment and the fundamentals of supply and demand in the marketplace. We then explore some of the other investment products that compete with or complement mutual funds. Sylvia provides the Foleys with some background information about how the financial markets work. She explains the concept of supply and demand and how it ties into the mutual funds that she will recommend. She also explains how inflation, interest rates, and economic cycles can affect fund performance. Don Foley inquires about some products his bank offered to sell him. Sylvia explains the differences between those products and mutual funds. Sylvia recommends that mutual funds will provide the flexibility and professional management that the Foleys require. Unit 6: Managing Mutual Funds In this unit, we describe the role of the portfolio manager and how the portfolio manager selects securities. The portfolio manager's job is to ensure that the mutual fund follows the investment objectives stated in the prospectus. We also explore the basis of performance information and risk measurements IFSE Institute 3

4 With so many mutual funds to choose from, Mrs. Foley is not sure where to start. Sylvia explains that it is her job to help them decide what is appropriate. Sylvia explains the different management styles portfolio managers may employ. As well, she discusses the past performance and risk factors of some of her choices. Sylvia also shows the Foleys how to track their holdings in the newspaper and on the Internet. Unit 7: Taxation In this unit, we discuss the Canadian tax system and how mutual funds are taxed. Furthermore, we explain the tax treatment for the various types of investment income. Taxation must always be considered before making any client recommendations. Before implementing any recommendations, Sylvia insists that the Foleys consult with their accountant or tax specialist. Sylvia wants to ensure that no conflicts will arise from her investment proposal. Sylvia also explains to the Foleys the general rules regarding taxation of investment income so they can be aware of the tax consequences at the end of the year. Unit 8: Pensions and Retirement In this unit, we describe the various public and private savings plans available in Canada. We also describe how RRSPs help Canadians save for retirement, and the rules regarding contribution limits and taxation. In her recommendations, Sylvia must consider all of the Foleys' retirement plans and future incomes. She suggests that the Foleys maximize their RRSP contributions to take full advantage of these tax-sheltered plans. In addition, Sylvia explains how the Canada Pension Plan and Old Age Security will contribute to the Foleys' retirement income. Unit 9: Responsibilities In this unit, we discuss the importance of the simplified prospectus, the exempt market, the rules regarding sales communications, and your obligations as a mutual fund salesperson. We also describe the registration process and your fiduciary duties to the client once you are licensed. The Foleys are very pleased with Sylvia and agree with her suggestions. Sylvia fulfills her obligation to provide a simplified prospectus and points out relevant information that the Foleys should understand about their mutual funds. After the meeting, Sylvia sends the Foleys a note thanking them for their business. Click Unit 1: Financial Objectives on the table of contents to go to the next unit IFSE Institute

5 Math Tutorial Welcome to Math Tutorial. In this lesson, you will learn how to perform the calculations you will need to perform throughout this course and on your exam. This lesson takes about 15 minutes to complete. After completing this lesson, you will be able to: perform a variety of mathematical calculations including addition, subtraction, multiplication, division, fractions, ratios, percentages, etc. apply common mathematical formulas and concepts Why Math? Throughout this course and on your exam, you will need to do a variety of calculations. As a mutual fund representative, you will not likely be required to know mathematics at an advanced level. However, there is no escaping it altogether! You will be expected to perform basic arithmetic calculations for your clients on a regular basis. In the following pages, we will cover: the basic order of operations (brackets, exponents, division, multiplication, addition, and subtraction) how to do exponents if your calculator does not have an exponential function how to handle percentages Order of Operations Whenever you are using a formula, you need to perform the calculations in the right order. You might find it helpful to learn the acronym BEDMAS, which stands for: Brackets Do any calculations inside brackets first. If there is more than one set of brackets, so that one set is nested within another, do the innermost brackets first. Consider this calculation: 4 (2 (1 + 2)) Step 1: Do the innermost bracket first: 4 (2 (1 + 2)) = 4 (2 3) Step 2: Then do the outer bracket: 4 (2 3) = 4 6 Step 3: Finish the calculation: 4 6 = IFSE Institute 5

6 Exponents Do exponents next. Exponents are sometimes called powers. Exponents may be written as: X n or X^n where n = the power or the exponent The calculator you have in an exam may not have an exponential function, so you will have to do this manually. An exponent means you multiply the base by itself "n" number of times. Consider this calculation: 4 x (1 + 2) 3 Step 1: Do the brackets first: 4 x (1 + 2) 3 = 4 x 3 3 Step 2: Do the exponent next: 4 x 3 3 = 4 (3 x 3 x 3) = 4 27 Step 3: Finish the calculation: 4 x 27 = 108 Note that if there is an exponent within a bracket, you should treat it as another nested bracket, which means you have to do the exponent first. Consider this calculation: 4 + ( ) Step 1: Expand out the exponent: 4 + ( ) = 4 + (1 + (5 5 5)) Step 2: Do the inner bracket first: 4 + (1 + (5 5 5)) = 4 + ( ) Step 3: Do the second bracket: 4 + ( ) = Step 4: Finish the calculation: = 130 Division and Multiplication Do the division and multiplication next, in the order in which they appear. Consider this calculation: (4 + 1) Step 1: Do the brackets first: (4 + 1) = Step 2: Do the exponent next: = (5 5) = Step 3: Do the division and multiplication next, in the order they appear: = Step 4: Finish the calculation: = IFSE Institute

7 Addition and Subtraction Do the addition and subtraction last. It does not matter which one is done first. Consider the calculation: (6 (2 3) 2 ) Step 1: Do the inner brackets first: (6 (2 3) 2 ) = (6 6 2 ) Step 2: Do the exponent next: (6 6 2 ) = (6 (6 6)) = (6 36) Step 3: Do the multiplication next: (6 36) = (6 36) = Step 4: Finish the calculation: = 236 Percentages When dealing with percentages, generally you should convert them to a decimal by dividing by 100. In a survey of 100 people, 70% liked sugar in their coffee. This means that 70 out of 100 people liked sugar in their coffee = 0.70 To convert decimals back to percentages, you multiply by of the 100 people surveyed prefer to have no sugar in their coffee. This is equivalent to 0.30 x 100 or 30%. You may be given a problem that requires your answer to be in percentage form but to get there you need to perform calculations dealing with percentages. In this case, you must convert all percentages to decimals, perform the calculations using order of operations, and then convert your final answer to a decimal again by multiplying by 100. It is very important that you remember to convert percentages to decimals before performing calculations. Otherwise, your answer will be incorrect. Consider the calculation (1 + 7%) 4 Step 1: Convert the percentage to a decimal: (1 + 7%) 4 = ( ) 4 Step 2: Do the brackets first: ( ) 4 = Step 3: Do the exponent next = = = 1.31 Now, if you forgot to convert 7% to 0.07, your answer would be: (1 + 7) 4 = 84 = 8 x 8 x 8 x 8 = 4,096, which is very different from 1.31! Note: If you have a percentage divided by a percentage, it is not necessary to convert to a decimal because this is a ratio. The answer will be the same whether you convert or not. 4% 25% = 4 25 = = IFSE Institute 7

8 However, if you are not comfortable with the idea of ratios, simply convert every percentage you see to a decimal and you will not go wrong. Exercise: BEDMAS and Percentages Future Value of a Lump Sum The following few pages introduce time value of money calculations. They are important to get an accurate value that incorporates compounding of interest over time. These calculations are beyond the scope of this course, but you should be aware of them for reference. If you want to estimate the future value of an investment made at a specific interest rate, compounded annually, you need to calculate the future value of a lump sum. The formula is: Joan invested $1,000 in a 5-year GIC at 4%. How much will it be worth after five years, rounded to the nearest dollar? Use these numbers in the future value formula: PV = $1,000 i = 4% = = 0.04 n = 5 So, FV = $1,000 (1 +.04) 5 Step 1: Do brackets first: $1,000 (1 +.04) 5 = $1,000 (1.04) 5 Step 2: Then do the exponent: $1,000 (1.04) 5 = $1,000 ( ) = $1, Step 3: Then do the multiplication: $1, = $1,217 Present Value of a Lump Sum The present value (PV) is the amount you would need to invest today at a specified interest rate, to receive a specified lump sum in the future. The formula is: IFSE Institute

9 Gary needs to have $5,000 in three years. How much would he have to invest today, rounded to the nearest dollar, assuming he could earn 5% compounded annually on his investment? Use these numbers in the PV formula: FV = $5,000 i = 5% = = 0.05 n = 3 So, PV = $5,000 ( ) 3 Step 1: Do brackets first: $5,000 ( ) 3 = $5,000 (1.05) 3 Step 2: Then do the exponent: $5,000 (1.05) 3 = $5,000 ( ) = $5, Step 3: Then do the division: $5, = $4,319. Future Value of an Annuity If your client uses a systematic savings plan, such as putting $2,000 into his or her RRSP every year, you can estimate how much will be in the plan after a specific period, based on an assumed investment return, by calculating the future value of an annuity. The formula is: Tanner plans to contribute $5,000 to his RRSP for the next 5 years. If he can earn 7% on his investments, how much will be in his RRSP at the end of the 5th year, rounded to the nearest dollar? Use these numbers in the FV formula: PMT = $5,000 i = 7% = = 0.07 n = 5 So, FV = $5, (( ) 5-1) Step 1: Do the inside brackets first: FV = $5, ((1.07) 5-1) Step 2: Remember, exponents within brackets are like inner brackets, so do the exponents next: FV = $5, (( ) - 1) FV = $5, ( ) 2010 IFSE Institute 9

10 Step 3: Do the last set of brackets: FV = $5, Now finish the multiplication and division, in the order they appear. FV = $28,757 So, Tanner should have $28,757 in his RRSP at the end of five years if he invests $5,000 a year and can earn 7% on his investments. Present Value of an Annuity An annuity is series of regular payments over a specified period. You may need to determine the present value of an annuity to estimate the amount of capital needed to fund an ongoing need for income. The formula is: If Zach dies, he wants enough money in his estate to provide his wife, Leanne, with $50,000 a year for the first 6 years after his death. If the money is invested at 5% compounded annually, how much money does Zach need in his estate to meet this objective? Use these numbers in the PV formula: PMT = $50,000 i = 5% = = 0.05 n = 6 So, PV = $50, (1-1 (1 +.05) 6 ) Step 1: Do the innermost brackets first: PV = $50, (1-1 (1.05) 6 ) Step 2: Remember, exponents within brackets are like inner brackets, so do the exponents next: PV = $50, (1-1 ( ) PV = $50, ( ) Step 3: The next set of brackets includes division and subtraction, so you have to do the division first PV = $50, ( ) Step 4: Now complete the brackets: PV = $50, IFSE Institute

11 Step 5: Now finish the multiplication and division, in the order they appear PV = $253,800 So, Zach would need to have $253,800 in his estate, invested at 5%, in order to provide $50,000 a year to his wife for 6 years. CIFC Formulas Click the icon below for the formulas you must memorize for your exam. Note: The following is a study aid. It is NOT a complete list of what you need to know for your exam. You are responsible for all the material found in your online course IFSE Institute 11