What are Mutual Funds Investments?
Mutual funds investments are a pooled investment with three key advantages for individuals considering a funds investment - professional management, diversification, and convenience.
While some individual investors focus on a single stock or company, those same investors can access a wide range of stocks and asset classes through mutual funds investments. Furthermore, many small investors ‘clubbing together’ in a pooled system, by combining their cash into a mutual funds investment, also access a professional fund manager.
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A professional fund manager can combine a high level of training and experience with all the technology and informational resources a funds management company has to offer. As such, he or she is capable of spreading the risk of your mutual funds investments over many different companies, assets, market sectors, and asset classes.
Put another way, the cost of purchasing securities would be impossible for most individuals, because of the amount of money that would be needed for securities transactions. Mutual funds investments reduce the individual’s costs, and increase his scope to diversify and reduce risk, by sharing transaction costs with other shareholders.
Well-managed mutual funds investments may cover a blend of stocks from various geographic markets. Some may invest only in US markets, some only in European markets, some mutual funds investments feature only bonds, others feature a mix of bonds and stocks.
Here again, the principle of reducing risk through diversification applies, as it applies to any funds investment. If you hold shares only in a single company, you run the risk that your investment could practically be wiped out if that company performs badly. In mutual funds investments, however, the combination of many companies, possibly spread over several markets with differing market conditions, means that as one company has a bad year, others will perform better and may reduce or totally cancel out the losses.
As with many funds investments, it is important to understand the nature of risk and the risk level of the various mutual funds investments you may consider. Before you can know your investment strategy, you must know your own mind – and establishing your risk profile is an essential first step in approaching mutual funds investments.
Work out your investment risk profile with our investment planner
How is money made with mutual funds investments?
There are three ways for the investor to benefit from mutual funds investments.
First, the owner of the investment benefits from income from interest on bonds, and dividends on stocks, within the mutual fund. Second, the fund may make capital gains by selling a security that is now worth more than when the fund bought it. Such gains are distributed to the shareholders in the fund. Third, holders of mutual funds investments benefit if the holdings in the fund increase in value and they sell the shares that comprise their mutual funds investments at a profit.
This third advantage – selling the shares in your holding - highlights another positive aspect of mutual funds investments: their liquidity. As an investor, you can convert your mutual funds investments to cash, very quickly, at any time.
