Problem 1You graduated and your job search led you to your dream job. Yay! The first day on the job, while you are finishing your employment paperwork, Emma Li, who works in Finance, stops by to inform you about the company's retirement plan. Retirement plans are offered by many companies and are tax-deferred savings vehicles, meaning that any deposits you make into the plan are deducted from your current pre-tax income, so no current taxes are paid on the money. For example, assume your salary will be $100,000 per year. If you contribute $6,000, you will pay taxes on only $94,000 in income. There are also no taxes paid on any capital gains or income while you are invested in the plan, but you do pay taxes when you withdraw money at retirement.

Your company uses TD Financial Services as its plan administrator. The plan has several options for investments, most of which are mutual funds. A mutual fund is a portfolio of assets. The return of the fund is the weighted average of the return of the assets owned by the fund, minus any expenses. The largest expense is typically the management fee, paid to the fund manager. The management fee is compensation for the manager, who makes all the investment decisions for the fund. Here are the investment options offered for employees.

• Company Stock.One option is stock in the company you now work for. The company is currently privately held. However, during the interview, you learned that the company stock was expected to go public via an IPO process in the next three to four years.
• TD TSX Composite Index Fund.This is a passive mutual fund that tracks the TSX Composite. Stocks in the fund are weighted exactly the same as the TSX Composite index. This means that the fund return is approximately the return on the TSX, minus expenses. Because an index fund purchases assets based on the composition of the index it is following, the fund manager is not required to research stocks and make investment decisions. The result is that the find expenses are usually low. The TD TSX Composite Index Fund charges expenses of 0.15 percent per year.
• TD Small-Cap Fund.This fund primarily invests in small-cap stocks. As such, the returns of the fund are more volatile. The fund can also invest 10 percent of its assets in companies based outside Canada. This fund charges 1.70 percent in expenses.
• TD Large-Company Stock Fund.This fund invests primarily in large-cap stocks of com- panies based in North America. The fund is actively managed and has outperformed the market in six of the last eight years. The fund charged 1.50 percent in expenses.
• TD Bond Fund.This fund invests in long-term corporate bonds issued by Canadian- domiciled companies. The fund is restricted to investments in bonds with an investment- grade credit rating. This fund charged 1.40 percent in expenses.
• 1

The standard deviation and average return of the funds over the past 10 years:

type.

TD TSX Composite Index Fund

TD Small-Cap Fund

TD Large-Company Stock Fund

TD Bond Fund

10-year average return

9.18%

14.12%

8.58%

5.45%

Standard deviation

20.43%

25.13%

23.82%

9.85%

1. Assume you decide to invest at least part of your money in large-cap stocks of compa- nies based in North America. What are the advantages and disadvantages of choosing the TD Large-Company Stock Fund compared to the TD Composite Index Fund.
2. The returns on the TD Small-Cap Fund are the most volatile of all the mutual funds. Why would you ever want to invest in this fund? When you examine the expenses of the mutual funds, you will notice that this fund also has the highest expenses. Does this affect your decision to invest in this fund?
3. What advantages do the mutual funds offer compared to the company stock? A friend told you that you should also look into the exchange traded funds (ETFs). What is an ETF? What is the difference between ETFs and mutual funds?