When it comes to investing, there are many methods of doing so. One such method is investing in mutual funds, which is extremely popular. In fact, there are trillions of dollars invested in mutual funds worldwide. This is because mutual funds often come with a number of advantages for investors, so there is no surprise why people flock to them. In this article, we have listed a few of the major advantages of mutual funds and whether they may be the right type of investment option for you.
What are mutual funds?
Mutual funds are a specific kind of investment fund that allows investors to pool their money together to invest in securities such as stocks, bonds, and other assets. Mutual funds tend to be operated by professional money managers, who help to allocate the fund’s assets in a way that benefits the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
There are many different types of mutual funds available, depending on what an individual is looking to invest in, and how long they want to invest. For instance, some mutual funds invest in the entire market, while others will only invest in a certain sector.
Mutual funds typically charge an expense ratio, which is a fee that covers the fund’s operating expenses – this includes administrative costs, marketing, and salaries – and provides a return for the fund managers. This fee is a percentage of the total assets that an individual has invested in the fund. In addition, a few mutual funds have a sales load, which is a commission fee. All of these may affect the overall return an investor gets back.
Diversification
One benefit mutual funds bring to the table is that they provide instant diversification for investors. This is because mutual funds invest in a wide range of securities and products. Instead of putting everything into a single stock or bond, mutual funds allow investors to spread their investment across multiple securities, asset classes, sectors, and even geographic regions. As such, diversification helps to reduce risk by minimising the impact of individual securities’ performance on the overall portfolio. In case a particular sector or asset is not performing so well, the other instruments will still be able to support the overall portfolio’s performance.
Professional Management
Mutual funds are typically managed by experienced and knowledgeable fund managers. They are the ones who make investment decisions on behalf of the investors. Due to their experience, these managers have access to the necessary research, market analysis, and resources that individual investors may not have. Fund managers aim to maximise any potential returns within the fund’s investment objectives. They also assist with monitoring portfolio performance and will make the necessary adjustments when the market fluctuates. This means investors can take a more hands-off and passive approach when it comes to investing.
Accessibility
Mutual funds are often accessible to a wide range of investors, whether novices or professionals. They typically have relatively low minimum investment requirements. This allows individuals that have smaller investment amounts to also participate in investing. Additionally, mutual funds are also available through various channels, such as brokerage firms, financial institutions, and direct fund companies. This makes them easily accessible to all kinds of investors.
Liquidity
Mutual funds offer liquidity to investors. This means they can buy or sell fund shares on any business day at the current net asset value (NAV). This helps to provide flexibility to investors who may need to access their funds quickly or make certain changes to their investment portfolio in a short period of time. Unlike certain investments such as real estate or private equity, mutual funds often provide a more liquid investment alternative to investors.
Affordability
Mutual funds allow investors to access a diversified portfolio of securities, without necessarily needing a large amount of capital. By pooling funds from multiple investors, mutual funds can achieve economies of scale. This, in turn, results in lower transaction costs and management fees when compared to individually investing in multiple securities. This makes mutual funds a comparatively cost-effective investment option, especially for those just starting their investment journey.
Some top mutual funds have an expense ratio of just 0.03 or 0.04 per cent annually of an individual’s invested assets, with some mutual funds even coming without an expense ratio. This is tremendously cheap and allows investors to keep more of their money working for them. Generally, low-cost funds are passively managed index funds rather than actively managed funds – which is something investors should keep in mind.
Transparency
Mutual funds are generally subjected to some form of regulatory requirements that mandate the necessary reporting and disclosures on a regular basis. Fund companies are therefore required to provide investors with detailed information about the mutual fund’s investment strategy, holdings, fees, and historical performance. This transparency helps investors to make informed financial decisions as well as better understand the risks and potential rewards associated when investing in a mutual fund.
Choice and Flexibility
Mutual funds tend to offer a wide range of investment options to suit different investor preferences and financial goals. So, whether an investor is seeking growth, income, capital preservation, or another specific investment objective, there are mutual funds available to align with their objectives. Investors have an array of options to choose from, ranging from equity funds, bond funds, index funds, sector funds, target-date funds, and more. Investors can pick based on their varying risk tolerance levels and investment preferences.
Automatic Reinvestment
Many mutual funds offer some form of dividend reinvestment program (DRIP). This program automatically reinvests any dividends or capital gains back into the fund. This allows the mutual fund to take advantage of the compounding of returns over time, therefore potentially accelerating the growth of an individual’s investments.
Regulatory Oversight
Mutual funds are generally regulated by financial authorities in the country where they are offered. Regulatory oversight helps to protect investors’ interests, promotes transparency, and ensures that the mutual fund operates with certain guidelines and regulations. In Singapore, mutual funds are regulated by the Monetary Authority of Singapore (MAS).
Convenience
Mutual funds make it extremely easy to invest in. Investors can hold them in a number of different accounts, including employer-sponsored retirement accounts, or in a brokerage account. The only thing an investor needs to do is place an order for the number of shares they want to buy. They then have to wait for the order to be filled at the end of the day. With technology advancing, this process can be automated – for instance by buying a set number of shares on a regular schedule.
Bottom line
Overall, there is no doubt that investing in mutual funds offers numerous benefits that investors can take advantage of. This includes its accessibility, being professionally managed, and allowing for easy diversification. That said, it is still important to keep in mind that all investments come with some form of risk. The value of mutual fund investments can fluctuate, and there is no guarantee of any returns. Therefore, investors should make it a best practice to carefully review the fund’s prospectus, assess their risk tolerance, and consider their investment goals before investing in a mutual fund.
