A mutual fund is a popular investment option. You have probably heard a lot about mutual funds. Most likely you have also heard that mutual funds can prove to be smart investments for any investor. This blog is an attempt to educate you about this popular investment vehicle.
What is a Mutual Fund?
A mutual fund is an investment which is made up of the pool of money collected from the investors with the purpose of investing in different securities such as bonds, stocks and money market instruments. A professional portfolio manager or a fund manager operates the fund against a fee. The portfolio manager decides how to invest the money with an attempt to produce income or capital gains for the mutual fund investors. The mutual fund portfolio is maintained and structured in line with the investment objectives stated in the mutual fund’s prospectus.
What Is Mutual Fund Fees?
There are two types of mutual fund fees namely the shareholder’s fees and the annual operating fees. The annual operating mutual fund fee is charged on an annual basis as an annual percentage of the mutual fund under the management. This fee usually ranges between 1-3%. The Shareholder’s fees are received in the form of redemption fees and commissions. Shareholders directly pay this fees when the funds are purchased and sold. Some mutual funds also charge a certain fee or penalty in case the investor chooses to make premature withdrawals.
What Are The Advantages of Investing In a Mutual Fund?
Some significant advantages of investing in mutual funds are listed below.
Diversification: One of the most striking advantages that mutual funds have to offer is diversification. Diversification refers to the mixing of a variety of investment types and financial assets within a portfolio to reduce risk. A diversified portfolio can be a combination comprising of hundreds or thousands of securities with different capitalisations, mapping to different industries. It also means investing in a variety of securities with different issuers and maturities. You can achieve diversification faster and cheaper if you invest in mutual funds rather than investing in individual securities.
Simplicity: You do not need any prior knowledge of financial statements, economics or financial markets to be a successful mutual fund investor because mutual funds are fairly easy to understand. Even though there are a few things you must know before making a mutual fund investment, mutual funds are easy to understand in comparison to the broad world of financial products.
Accessibility: You can easily invest in mutual funds through discount brokers online, brokerage firms, banks, insurance companies, and brokerage firms. If you are a beginner, then you can conveniently open a mutual fund account at a no-load mutual fund company like Van Guard Investments within a couple of minutes. It’s relatively easy to sell and purchase mutual funds. This makes them a highly liquid investment. When the specific class of assets such as exotic commodities, foreign equities is in question then investing in a mutual fund is more than often the most feasible way, in some cases probably the only way that facilitates the participation of individual investors.
Economies of Scale: Another unique feature of a mutual fund is that it offers economies of scale. This can be easily explained with an example of volume discounts. You will see that in many stores if you buy a large volume of a specific product, or the more you buy a product, the cheaper that product becomes. Say if you buy 30 doughnuts the price per doughnut decreases. The same concept applies to the purchase and sale of securities. Mutual funds can benefit from the selling and buying of the large volume of securities, and this substantially reduces the transaction costs for individual investors. Hence investors can diversify their portfolio without having to bear numerous commission charges. Investors can make the investment at a much larger scale for a lot less money.
Liquidity: Mutual funds have high liquidity. This means that you can buy or sell mutual funds with relative ease and with less or no difference between the purchase and sale price based on the current market value. However, if you wish to make a sale, you should look out for any fees associated with the same such as back end load fees. Once the net asset value of the mutual funds is calculated mutual funds transact only once every day.
Professional Management: Whenever you buy any mutual fund, a professional money manager or the portfolio manager is always attached to the deal. On the basis of his/her expert knowledge, the professional money manager will invest your money in different securities, based on your objective and based on his/ her research in an attempt to maximize your profits. With Mutual funds, you don’t need to thoroughly research the market before making an investment unlike in the case of other securities. When you invest in a mutual fund, your professional money manager duly takes care of this load.
Style: As an investor, you have the option of choosing from a variety of different professional money managers with different investment styles and management goals based on your financial objective and risk-taking appetite. You may select a fund manager who may focus on growth investing, emerging markets, developed markets, value investing, macroeconomic investing, and income or incorporate different styles based on what you are looking for.
What Are The Types Of Mutual Funds?
Mutual funds can be categorised on the basis of investment objective, structure and asset class. Some of the types of popular mutual funds based on asset class include debt funds, equity funds, sector funds, balanced funds, hybrid funds, index funds, tax-saving funds, and money market funds. Types of mutual funds based on the structure would include close-ended funds and open-ended funds. Income funds, liquid funds, and growth funds are the categories of mutual funds based on investment objective. On the basis of investment goals, mutual funds can be categorised as growth funds, Aggressive growth funds, balance funds, money market mutual funds and income funds.
Now that you know the basics of mutual funds as an investment vehicle your next step is to understand your financial goal, risk appetite, the type of mutual fund that best suits your needs, your affordability and the style of mutual fund that best suits your objective before you make a mutual investment.