Mutual funds are a very popular investment vehicle and have a long history worldwide. In fact this investing concept has been around for over 230 years. They are also known variously as managed funds and unit trusts. In an attempt to learn a bit about them let us look at some facts about mutual funds.
Mutual funds are Pooled Investments.
Your money is pooled with other investors so that you can access markets with small sums of money and access areas of investment that are usually only the domain of larger investors. Rather than buying shares you buy a number of units. These units are invested in a number of assets which can be shares, bonds, property, cash, as well as international markets, depending on the type of fund you are investing in. Investors with only limited funds are able to invest in mutual funds because of the pooling of their funds with other investors and it is this that makes them so popular.
Diversification is possible with small amounts of money and is one of the main appeals of managed funds. The very fact that your money is spread through different asset classes, or in the case of say a share fund you are invested in a number of shares within that one investment, you achieve diversification.
The advantage of mutual fund investing is that you have a professional manager looking after the investing. They use their skills and many resources to make decisions on your behalf. This is their area of expertise and what they have trained for. This is great for people new to investing as they can leave it to the professionals while they learn about investing.
Returns in mutual funds come from dividends on shares, interest on bonds and fixed interest. There is also a growth component. This is the increase in value of the units. The increase in value of the units is not actually a return unless the units are sold as they can also drop in value wiping out a previous ‘return’. Selling the units locks in the returns. This can be likened to the ups and downs of the share market.
A prospectus is available for mutual funds and this has certain information to enable investors to make informed decisions before investing. Among other details it includes fees, where the managers are allowed to invest in terms of the mandate of the fund and what returns the fund has made. It is a legal requirement for investors to be provided with the prospectus.