Always have a retirement plan. When the adults say that, they are definitely on to something. If we makedo now when we are still young enough to work, how is it going to be when we are retired and barely have any energy to work? No amounts of coffee is going to pump up the energy in us.
Enter Mutual Funds, ever heard of it? Somewhere in those television ads, when intentionally or unintentionally eavesdropping adult conversations. We have definitely seen it on billboards or in banks. Is it just bank jargon that we can live our life not knowing what it is? So what exactly are Mutual Funds? And, more importantly, how do we make money (Read:profits) out of it?
When it comes to savings or even investing in something, stocks are the first thing that comes to one’s mind. That’s one way to do it. Invest in Mutual Funds. Yes, that is a comparatively safer and more viable option for someone who is just starting out in the saving business.
If you are just starting out, let me tell you this- “There are about thousands of Mutual Funds to invest in and just like you are in a candy store it is difficult to choose just one.
What Mutual Funds do, is they give individual investors access to equities, bonds, and other securities. Meaning, each and every shareholder gets a share if the fund profits or loses if the fund incurs a loss. There are a wide amount of securities in which Mutual Funds invest in. The performance is usually tracked as the change in the total market capital of the fund. One of the best things about Mutual Funds is that if you one day wake up and decide to invest in them, you totally can.
Net Asset Value(NAVs)
The funds have a current Net Asset Value(NAVs), this is the value at which the Mutual Fund shares or as it is known as ‘units’ are purchased and redeemed. They are done at per share value- (NAVPS). How is the NAV derived? It is done so by dividing the total value of the securities in the portfolio by the total amount of the shares outstanding.
Mutual Funds pool in money from the public that has the money to invest to buy securities such as shares and bonds. Over here, one measures the standing of the company on the basis of how the securities they purchased are doing. So if you are buying a unit of a Mutual Fund, you are buying its performance.
When we are talking about Mutual Funds, one thing is abundantly made clear, there are hundreds or even thousands of different securities. So if someone is investing in them, they are investing in multiple different stocks. For instance, let’s take 2 people- Jack and Jill. Jack invested in Stocks while Jill invested in Mutual Funds. Jack bought shares of Company A, that has a bad quarter right after, while Jill bought some shares of a mutual fund that happens to own some Company A stocks. Who incurs a bigger loss?
Mutual Funds are like virtual companies that deal with buying of stocks/units of a company after careful consideration of an investment advisor.
Kinds of the Mutual Funds
The different kinds of Mutual Funds are nothing but the kind of securities the mutual fund advisor invests in.
1.Money Market Funds
They invest in government bonds, commercial papers, certificates of deposit etc. They are a safe bet but the Return of Investment(RoI) is usually lower compared to other kinds of Mutual Funds.
2. Fixed Income Funds
This kind of Mutual Fund also includes government bonds but they also include investment grade corporate bonds and high yield corporate bonds. They have fixed RoI. They aim at getting recurring deposits mostly through interests.
3. Equity Funds
These funds invest in shares. They are a higher risk when compared to the other two funds. A plus point of this fund is that you can choose from different kinds of funds.
4. Index Funds
The value of this mutual fund is directly proportional to the performance of the index. They have lower cost when compared to the other kinds of Mutual Funds that are active.
Mutual Fund Fees
Coming to the price at which investing in Mutual Fund comes, there are two categories-
Annual Operating Fees
The Annual Operating Fees are the annual percentage of funds that ranges about 1-3%.
These fees are usually the commission or the redemption fees that are paid at the time of purchasing or redeeming shares.
There might be additional charges. There is something called the load of mutual fund. Frontend load is incurred at the time of buying of shares. Backend load is incurred at the time of redeeming of shares.
Other than that, there might be fees or penalties for early withdrawal. So make your decisions wisely and after careful consideration.
Advantages of Mutual Funds
1. Diversification - One of the benefits of Mutual Funds is reducing of risk by mixing up of various investments and assets. Like in the earlier example of Jack and Jill, Jill opting for Mutual Funds gave her the opportunity to invest in multiple stocks instead of just sticking to one.
2. Easy Access - The thing about Mutual Funds is that it can easily be purchased or redeemed. They make to be really good liquid investments. In some cases, Mutual Funds end up becoming the only way for investors to take part.
3. Professional Management - In general, a lot of investors only make deals with people who have huge sums to invest but that is not the case with Mutual Fund Managers, they spend a lot of time researching and analyzing patterns giving way for people to invest.
Disadvantages of Mutual Funds
1. Fluctuating Returns - There is always a risk where there is money involved. Similarly, in the case of investments especially Mutual Funds, there might be cases where their value might decrease. So people who invest in them should be aware of that. Different kinds of Mutual Funds experience a different degree of risks. Also, know this, The Federal Deposit Insurance Corporation (FDIC) does not back up mutual fund investments, and there is no guarantee of performance with any fund.
2. Cash - It is a known fact that Mutual Funds get their investment from thousands of investors, so there is coming in and going out of money on a regular basis. So in case of withdrawals, it is essential to have liquid cash but then having that kind of money lying around can be dangerous.
3. Lack of Transparency - There is a lot of ambiguity and vagueness when it comes to the name of the assets in some cases. Manipulation ends up swaying the investor in particular stocks favor that might end up being counterintuitive.
There is a lot to be taken into consideration when investing your hard earned money. Whether it’s in stocks, Mutual Funds or whatever it is. Always take in account all the pros and cons and it’s good to have a financial advisor appointed that will guide you through the entire process.
The Author Afshan Fatima, Content Strategist, GrabOn