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Highlights
- A large section of the masses fear the financial markets.
- This fear is mostly driven by the complexities and risk factors that they come along with the financial markets.
- Both these factors can be somewhat managed if one were to understand the mechanics of mutual funds.
A large section of the masses fear the financial markets, and this fear is mostly driven by the complexities and risk factors that they come along with.
Both these factors can be somewhat managed if one were to understand the mechanics of mutual funds.
In other words, a mutual fund can be an investment option that you do not have to manage by yourself, and where you can do away with investing a small amount of surplus money that you can risk.
Let understand this better.
What is a mutual fund?
Suppose you are going to a party with a bunch of your friends, and instead of everyone buying individual presents, one person with a good understanding of gifts collects the money and purchases a single gift basket on behalf of everyone.
Mutual funds function a similar manner, where a fund is created by pooling investment from a number of investors to buy a collection of securities, such as stocks and bonds.
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This diverse portfolio, now a single asset, is owned by the group of investors and professionally managed.
The term ‘mutual fund’, introduced in the 1890s, is more commonly used in Canada, the US and India. Other countries, however, also have similar financial structures, such as open-ended investment company (OEIC) in the UK and collective investment scheme SICAV in Europe.
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How to evaluate a mutual fund’s value?
The price of a mutual fund is measured by dividing the value of all the assets in the fund by its total count of outstanding shares.
A mutual fund’s value usually fluctuates on a basis of the closing value of each asset it comprises, which is also known as its ‘Net Asset Value’, or ‘NAV’.
While the crest and trough of this value can trigger some concern, many experts in the field suggest that a mutual fund’s real value can be noted in its long-term performance, such as on a five or a 10-year basis.
How many kinds of mutual funds are there?
Basically, they are of two kinds:
- Actively managed funds are the ones which, as the name suggests, are actively managed by a portfolio manager, who is responsible for doing in-depth market research and finding the best suited securities to include.
- Passively managed funds are the ones that are attached to a particular index, such as the Canadian Securities Exchange (CSE).
How to invest in mutual funds?
Once you have mapped out your budget and savings and calculated how much surplus money you can afford to invest, you can pick a mutual fund of your choice based on that.
Based on your research of the market and understanding of your risk appetite, you can either go for an active or a passive fund.
At this point, a broker can help you find the right mutual fund, but it is vital to keep in mind that some brokerage platforms ask for an account minimum.
Brokers and portfolio managers aside, it is best to personally be aware of where your hard-earned money is going, For this purpose, it is advised that investors go through the terms and conditions before making any commitment.
Bottomline
Once you have signed up, don’t forget all about it! Again, it is best to keep track of your mutual fund on a regular basis if not daily. Based on the fund’s performance, you can look into rebalancing or diversifying the portfolio of assets. This can help your mutual fund grow further and stronger in the long run.
