If you’re looking for the best mutual funds to invest new money in right now, we suggest you add to conservative Canadian and foreign stock funds. As well, emerging markets stock funds continue to look attractive for investors who can tolerate high risk.
We think most investors with an investment time frame of at least five years should cautiously buy equities on a gradual basis now. But if you’re approaching retirement within the next 10 years, you may want to take profits on market strength and start preparing for your future cash needs with fixed-income securities that mature when you’ll require the cash.
From a shorter-term perspective, we think stock markets have the potential to move modestly higher between now and year end. But we wouldn’t discount the possibility of a sharp correction occurring between now and then.
Among the factors supporting a continuing rise in the markets are the low-interest policy of the U.S. Federal Reserve and a widely anticipated pickup in U.S. economic growth during the second half of the year. And faster U.S. growth will certainly give a boost to Canadian economic growth through higher exports.
On the other hand, equity valuations are high, but not too high. On a trailing basis, the price/earnings ratios of New York’s S&P 500 and Toronto’s S&P/TSX Indexes are 17.9 and 20.5, respectively. We would feel more comfortable with the New York market at around 16 times earnings. On a forward basis, the S&P 500 trades at just under 17 times estimated earnings for 2014, and just over 15 times 2015’s earnings.
Strategies to Adopt
Pick funds according to your tolerance for risk. Large-cap, diversified funds (including index funds) and value-oriented funds typically suit those with relatively short time frames — about five years. Anything less than that and you should concentrate on fixed-income securities. They will also best suit those with a low tolerance for volatility.
Some funds in this category include Beutel Goodman Canadian Equity, CI Canadian Investment and Mac Ivy Canadian (follow a blended approach).
Growth-oriented funds can often suffer the most in sharp market setbacks. But the well-managed ones, true to their growth discipline, will recover. And recovery plus future growth will make these funds winners over the longer term.
Funds in this category include Franklin Bissett Canadian Equity (growth at a reasonable price), PH&N Canadian Equity and GBC Canadian Growth.
For foreign investing, the same reasoning applies. Value funds include Templeton Growth and Templeton International Stock. Buy Capital Group Global Equity for growth.
Canadian Mutual Fund Adviser, MPL Communications Inc.
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