Understanding Mutual Funds
A 'mutual fund' is a pool of money from different people with the same objective. It gives you access to opportunities to grow your money that you wouldnâ€™t normally have access to if you didnâ€™t have a lot to invest.
Your money is pooled together with that of other investors, and spread over a range of asset classes such as bonds (and money market instruments), equities and cash. The collective assets in the fund are called a portfolio, and they are managed by an experienced fund manager on your behalf. For this service, the fund manager charges a small annual fee known as a management fee.
Your investment in the fund is divided into shares, and the number of shares held represent your ownership stake of the fundâ€™s overall assets, and the return those assets generate. The prices of these shares will fluctuate daily as the underlying value of the assets rises and falls â€“ and your individual stake will rise and fall accordingly.
WHO SHOULD INVEST IN A MUTUAL FUND?
Mutual funds are a great way to invest:
- If you are looking to build a nest egg for the future
- If you can only invest a small amount at a time
WHAT ARE THE KEY BENEFITS?
- Lower risk because your money is spread over different companies and asset types. When the value of one asset in the fund falls, another may rise. This means your risk overall is significantly less than when you put your money in a single investment.
- Better rates because by pooling money with other investors your combined buying power is greater than if you invested on your own and you have access to some assets and markets that you would not have if you were investing smaller amounts on your own.
- Reduced costs because some costs and charges are spread across all investors in the fund. Therefore, you can carry out large transactions for much lower cost than if you were buying the assets directly.
- Saved time and effort with an experienced manager who invests on your behalf. Your money is managed by a professional with expertise and access to market and research information you may not have, who is able to monitor the investment better because it is his full-time job.
- Easy access to your money by being able to cash in your investment at any time. You can make additional contributions or withdrawals to your investment whenever you want.
- Simple to use and monitor. You can make automatic transfers to or from your bank account, and check your fundâ€™s performance figures conveniently online. You also receive regular reports on how your money has been invested, and can choose whether you want your returns to be paid out as income or automatically reinvested.