Demystifying RRSP jargon
If you've ever felt confused about the language of RRSPs, you're not alone. While it's true RRSPs tend to have their own jargon, all it takes is to know a few basic definitions and you'll be better positioned to review your RRSP investment options.
Here are explanations of some common terms:
Portfolio
A term describing all the investments you own - stocks, bonds, mutual funds, GICs, and so on. A diversified portfolio contains a variety of investments or assets.
Financial plan
The overall financial picture that outlines objectives and strategies for tax, estate, retirement, investment and risk management planning.
Simplified prospectus
A document that must be provided to investors at the time they buy mutual funds and certain other investments. It describes the investment, the investing objectives, management, potential risks, tax issues, fees and other data so that you can make an informed investment decision.
Asset allocation
How your portfolio is diversified among the three main asset classes: cash and investments like cash, fixed-income investments such as bonds, and stocks or equities.
Spousal RRSP
One person in a marriage or common-law relationship makes tax-deductible contributions to an RRSP that is registered in the name of their spouse. Spousal RRSPs are used by many couples to improve their overall tax position in retirement. However, the contributions reduce the amount that person can contribute to their own RRSP.
Diversification
Investing so that all your eggs aren't in one basket. By spreading your investments among different geographic regions, currencies, and types of assets such as stocks and bonds, you spread out your risk. Mutual funds are a popular way for investors to diversify across different types of investments and markets.
With mutual funds being the RRSP investment of choice for many investors, you may need to know some terms specific to funds:
Money market fund
A mutual fund that invests in short-term debt instruments offering safety and liquidity. T-bills issued and guaranteed by federal and provincial governments are common investments. Money market funds are often managed so that their units usually have a constant value of $1 or $10. Their performance is measured by the rate of interest they earn.
Equity fund
A mutual fund that invests primarily in shares of companies that are available on the stock market (some invest in markets around the world). The objective of an equity fund is usually long-term growth through capital appreciation: as a company grows and prospers its shares become more valuable. Some income may also come from dividends, which are amounts paid per share to shareholders from a corporation's after-tax profits.
Bond fund
Also called an income fund, it is a mutual fund that invests in debt securities such as government and corporate bonds. In addition to generating interest income, a bond fund may generate capital gains or losses as a result of interest rate changes and the underlying financial well-being of the issuer.
Balanced fund
A mutual fund that invests in equities and interest-bearing securities, such as bonds. A balanced fund may produce a mix of earnings from capital gains and dividend and interest income, while exhibiting less variability than equity funds.
Yield
The expected return from an investment, whether it is a bond or an equity.
Marginal tax rate
The top rate of tax that is charged to individuals on their last dollar of earnings. This also indicates how much tax you would save on each dollar of income that does not need to be reported on your tax return. For example, if your marginal tax rate is 40 per cent and you contribute $1000 to your RRSP, you will save $400 in tax.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
