I have mixed feelings about mutual funds.

Pros

Diversification

Mutual funds over diversification over individual stocks.

Personal Benefits

check writing, bank transfers

Regular investments

mutual funds generally do not charge to invest money in them so someone wanting to invest on a regular basis can do so with no consequence.

Reinvestment

mutual funds are handy when you want to reinvest dividends as there is no charge.

Cons

Expense ratio

Managed funds usually have a high (over 1%) expense ratio.

Unrealized capital gains

The bane for taxable funds. When you buy mutual fund shares there may be capital gains already accrued. It is possible to buy fund shares one day and the next day have to pay on capital gains you did not benefit from.

Capital gain distributions

Most mutual funds have long and short capital gain distributions at the end of the year, generated by buying and selling stocks. Even if there is no gain (or a loss) on the mutual fund you still have to pay the capital gains tax. You have no control when a fund buys or sells stocks - it is to meet their need, not yours.

Trading woes

Once purchased, you are liable for any capital gain/losses when you sell.
Reinvested dividends do not add to the cost basis as you have already paid tax on them.

Fund Manager revolving door

there is no guarantee that a star fund manager will stay with a mutual fund.

Summary

Royalty trusts purchase the rights to royalties from the cash flow and sale of a natural resource company, generally oil or gas. They provide a higher than normal (stocks and bonds) yield. Popular ones are Canadian royalty trusts (canroys) and U.S. royalty trusts (usroys). Each have their advantages.

Pros

Above average income

Royalty trusts generate above average income compared to stocks and bonds.

Depreciation and depletion can be written off

Since the RT is a depreciating asset, a portion of the income is considered a distribution can be written off, i.e. the cost basis is reduced.

Possible tax credit

Some RTs use energy from unconventional resources and may qualify for a fuel tax credit.

Cons

No principal returned at the end of the trust

The original investment is generally never returned at the end of a trust. It is returned as ‘return of capital’ and can be deducted on income tax returns. This is because a RT is a depleting asset that eventually turns into nothing.

Income varies

The income generated varies and is not fixed, like a bond or preferred stock. So a 10% yield may go higher or lower over time. The price of the commodity, generally oil or gas, can vary which impacts the income. Income is usually distributed on a quarterly or monthly basis.

The income is not a dividend

The income generated is not a dividend so it is taxed as such.

Part of the income is considered “return of capital”

Owners are required to file report the pro rata portion of a trust’s total income and expenses on their tax returns. This typically means filing Schedules E and B as well as having additional work with Form 1040.

State income taxes

Owners of trusts are liable for paying income taxes in the states in which the trust generates its royalties. Different states have different thresholds for when taxes have to actually be filed and paid, and the likelihood of owing income tax in multiple states increases with the size of a given ownership position.

U.S. royalty trusts have a finite life

U.S. royalty trusts cannot buy and sell assets (unlike Canadian trusts) thus they have a finite life.

Canadian Royalty Trusts

Canroys are open-ended royalty trusts, meaning they can add assets anytime. Canroy owners pay a 15% foreign tax which is put on the U.S. tax return as a nonrefundable tax credit (i.e reduces your tax payment).

U.S. Royalty Trusts

usroys are closed-end royalty trusts, meaning they have fixed assets. Most usroys are oil and gas related so they are depleting assets and have a finite lifetime.

Details

Look for the expected life left of the trust.