Mutual funds were first introduced to make investing easier by enabling people to cut through the investment jungle. With so many Mutual Funds available, selecting the right funds may seem overwhelming at first. But by learning a few basics and by working with a financial advisor, you can select the funds that fit your investment goals.
What is a mutual fund?
A mutual fund is a pool of investors' money invested by a professional money manager in securities markets based on the objectives of the mutual fund as stated in its prospectus.
Each mutual fund is managed according to a set of defined objectives. This gives investors the freedom to choose a fund which is consistent with their personal goals.
Professional fund managers use the pooled investors' money to buy different types of securities, generally stocks and bonds. Due to the large size of mutual funds, managers have access to securities not available to individual investors. Size also allows for greater diversification of securities - an important benefit to the investors.
Mutual funds allow investors to invest in the world security markets without the day to day need to manage their own investments. This is the job of the fund manager.
Mutual funds offer:
- Professional money management
- Growth potential
Discover the key benefits of mutual funds
Investing in a mutual fund is like taking a packaged vacation. You decide where you want to go, and in return for a fee, the travel company arranges to take you and everyone else who signed up to the destination of your mutual choice. You have your privacy, and you may or may not know anyone else in the tour group. In fact, the only thing you may have in common with anyone else on the trip is that you want to go to the same place.
The benefits of going on a packaged vacation are that you don't have the stress and worry of getting there. It's all arranged. All you have to do is decide where you want to go.
The travel company has people who are trained and have the contacts to get you to your destination safely. It's up to them to negotiate the details, give good service and respond to any needs you may have while you're in their care.
It's the same with mutual funds. You choose a fund that's headed in a specific direction, and the fund company charges you a fee to take you there. Other investors in the fund have the same destination, but you may not know who they are, and their money and goals are totally independent of yours.
Mutual funds offer diversification across industries and over various international markets. Thus the small investor can reduce the risk that is inherent in the ownership of a small number of stocks.
In a mutual fund, a professional money manager decides how to invest your money and that of others. Each fund has its own investment objectives and invests in some combination of bonds, cash or stocks.
On purchasing a mutual fund, the investor receives exchange units or shares of that fund. A mutual fund's unit value is described as the net asset value per share (NAVPS). The NAVPS is calculated by taking the total value of the fund if everything were sold on that day, less any outstanding debts it owes, and dividing by the number of units held by all the fund's investors. For example, if a fund is worth $10 million (value less what it owes) and has one million units outstanding, the NAVPS will be $10. If you own 10 units your investment is worth $100.
What is the role of the mutual fund company?
It's the fund company's job to research, analyse and choose the investments that will take you where you want to go. It's also the fund company's job to make sure your account is accurate and up to date, and that you're kept aware of how your investment is performing.
Now you may be thinking that you don't like "packaged deals" and would rather explore or set up your own vacation – and investment – plans. In both cases, there's a sense of adventure associated with "doing it yourself." But if you don't know what you're doing, you can make mistakes – and mistakes can be costly, especially when your hard-earned money is at stake. So you should consider taking advantage of package deals and guides before you head out on your own.