Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific advice on successful investing, including how to profit in Canadian mutual funds. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “These 3 rules can help you make higher profits in Canadian mutual funds with less risk.”

Here are 3 rules we stick to when we’re researching mutual funds to recommend, including the 10 fund picks we’ve included in our special report “Mutual Funds Canada: Inside the Top 10 Canadian Mutual Funds.” While a mutual fund’s performance is never guaranteed, following these rules should help you avoid making poor choices.

• Avoid Canadian mutual funds whose managers pride themselves on trading heavily. Some of the most dangerous funds are those run by managers who honestly believe they can increase their performance by frequent in-and-out trading. Many of these managers fail to realize how close their mutual funds come to disaster each year, until disaster finally strikes.

  If you add up a heavy trader’s losses at the end of a given year, they may amount to a high percentage of their fund’s assets (25%, for example). That may seem perfectly acceptable to the mutual fund manager, so long as the profits on their winning trades are significantly higher than that (for example, 75% of assets).

  If the mutual fund manager guesses wrong a few times, however, it’s all too easy to reverse those figures: that is, have losses totalling 75% of assets and profits totalling 25%, so that the mutual fund loses 50% of its capital. If the manager delves into low-quality or highly volatile choices, as heavy traders are apt to do, then the mutual fund’s performance can drop sharply.

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• Avoid funds with a lot of dead weight. When a fund’s portfolio shows page after page of obscure speculative stocks, particularly thinly traded stocks or recent new issues, you can be exposed to a concealed, but very serious, risk. If the market drops, and too many investors want their money back, the mutual fund may have to sell some of its assets to raise cash.

  Obscure speculative holdings will prove hard, if not impossible, to sell when prices are generally low. This may force the mutual fund manager to dump his or her best holdings at a time of market weakness.

• Avoid funds with anonymous managers. This includes mutual funds run by committees. The trouble here is that the brains of the mutual fund may leave, and investors would never know it until they saw the drop in their mutual fund’s performance.

Next Wednesday, October 20, 2010, Investor Toolkit will look at the role of small and large cap stocks in your portfolio.

In “Mutual Funds Canada: Inside the Top 10 Canadian Mutual Funds,” we show you which mutual funds could make you exceptional profits over the next year. You get our in-depth analysis of each fund, plus our latest strategies for maximizing your mutual-fund profits, weathering a market slump and more. Click here to learn how you can get started right away.