There are several investments you can put your money into and earn a good amount, both actively and passively. One of such is Mutual funds. It is one of those areas that you can invest in, and earn money even while you are asleep, without losing your sanity.
Currently, it is one of the major investments that a lot of investors put their money into in the US. So, needless to stress its popularity has also proven to yield good Returns on Investment (ROI). Although, the risks involved in some are higher than others. Usually, those with higher risks are also characterized by higher potential rewards.
When you invest in Mutual Funds, you own shares in companies that buy shares in other companies (it could be in bonds, gold, securities and other financial assets worth investing your money in). Although you do not directly own stocks in the companies from which your funds were used to purchase, you have an equal share in the profits or losses allocated to the total of your fund’s holdings. This is what gave birth to the ‘mutual’ in the name of mutual funds.
What is a mutual fund?
A Mutual fund is a form of investment where money from interested investors is gathered for the purpose of investing in stocks, bonds as well as other assets. It gives room for a diversified portfolio, which is usually more than what an average could own. This is why multiple investors are involved.
They are usually managed by professional fund managers who buy and monitor securities. These managers are appointed by Asset Management Companies (AMCs) and are saddled with the responsibility of managing different mutual fund schemes as well as ensuring that the investment objectives are achieved. Although, these services come at a price charged to the investors.
Types of Mutual fund
There are majorly four (4) types of mutual funds available to investors. They are Equity funds, Bond funds, Money market funds and Balanced funds.
· Equity funds
According to the Investment Company Institute (ICI), Equity funds account for the highest mutual funds in the market; which is about 55%. It has higher growth potential and is more volatile in value.
Because of the high rate of inevitable ups and downs steeped by the equity funds in the market, financial advisers advise younger investors to invest in equity funds.
· Bond funds
The bond fund is also regarded as a big category of mutual funds. The Investment Company Institute (ICI) statistics revealed that it gulps about 22% of all mutual funds in the United States. Its risk level is usually lesser than equity funds’.
The returns on bond funds investments to investors are usually constant. This is why it is sometimes called fixed-income funds.
Under this type of mutual fund, managers buy relatively cheap bonds with plans to sell at a profit.
This fund invests more in corporate and government debt. These are considered safer than stocks. Similarly, this mutual fund has less potential to grow compared to equity funds.
· Money market funds
The money market fund has the lowest risk involved and simultaneously, the lowest returns. They invest in investments with high-quality and short-term like banks and other government-sanctioned corporations.
This mutual fund accounts for up to 15% of mutual funds in the market. Although it does not return any profits, you do not have to lose sleep over the possible loss of capital. The US Treasury is an example of money market funds.
· Balanced funds
This type of mutual fund is also referred to as asset allocation funds or hybrid funds. It is a mixture of both equity and bond funds. It is also characterized by a fixed investments ratio of 60:40. Where 60% is for stocks and 40% is for bonds.
The balanced fund is the go-to investment option for investors that are close to their retirement age. It makes up to 8% of the mutual fund market.
Why invest in mutual funds?
While it is great to understand the types of mutual funds to invest in, it is also important to know why you should consider investing in mutual funds.
There are numerous reasons to invest in mutual funds, we have identified the following benefits of mutual funds to you as an investor. They are;
1. It offers diversification.
This is probably the greatest or one of the greatest benefits of investing in mutual funds. The moment you invest in a fund, you instantly have access to scores of other bonds and stocks.
Buying a mutual fund allows your money to be jointly invested with that of other investors. This then allows you to purchase part of the investments pool.
It is also beneficial to you as an investor when you buy different funds. This is because not all investments do well every time. So, when one is not doing well, you may find solace in another.
2. They are managed professionally.
When you invest in mutual funds, you have professionals dedicated to managing your portfolio. This is unlike buying individual stocks that will require you to always keep up with the market trends and always check the ups and downs of the market.
Having these professional managers work for you saves you the headache and time you would have to dedicate to managing your investment by yourself. These professionals also advise you accordingly.
3. Mutual funds provide you with varieties of investments.
With mutual funds, variety is the spice of investing. You are not short of investment opportunities.
Aside from the four major mutual funds that we identified earlier in this article (equity, bond, money market and balanced funds), you still have other investment options like Index funds, specialty/alternative funds etc.
You also have the choice of investing in either active or passive mutual funds.
4. Easily Accessible.
With as little as $1,000, lots of mutual funds companies allow investors onboard. You do not necessarily have to invest your life savings to start investing in mutual funds. This low cost avails the investment opportunity to as many as interested in the opportunity.
It does not fall in the category of investments that you would have to run from pillar to post to be able to raise the capital.
5. Some mutual funds companies encourage systematic investing and withdrawals.
For some companies, they give investors the option of investing systematically just as they do the same on withdrawals.
Some mutual funds companies encourage investors to invest as little as $50 monthly. The funds can be drawn on an agreed date monthly from a bank account that has been pre-linked to the mutual fund portfolio.
Similarly, regular withdrawal in bits is not frowned at. These services are generally free.
6. Allows auto-reinvestment.
As an investor, you can have your capital and dividends reinvested automatically if you wish. This also increases your chances for profits.
You also have the option of reinvesting your capital and withdrawing your dividends, and vice-versa.
7. Mutual fund is transparent.
Information about mutual funds is usually made public. So, you are not investing in a hidden venture. News about your investments is in the public domain and nothing is hidden from the members of the public.
Your portfolio also tells you the underlying security that you are investing in (stocks, gold, bonds, or a combination of all etc). You can find all this information and more on the mutual fund company’s website.
8. Mutual fund is liquid.
Mutual fund investment is not one that makes it impossible for you to get cash when you need to. Within a few days, you can withdraw from your brokerage account. You can also sell your mutual fund and convert the same to cash quickly when pressed for cash.
Depending on the mutual fund company, settlements may take up to two (2) business days, but this is still faster than the process in other assets like real estate.
9. Audited track records exist.
It is part of the regulatory requirement for mutual fund companies to keep past audited records. These records are part of the documents that investors may want to look at before they decide to invest or not.
While onboarding investors, the mutual fund companies also provide investors with prospectus as well as annual and semi-annual reports. All these bear records are capable of building investors’ confidence.
10. Mutual fund builds wealth.
As stated at the beginning of this article, the mutual fund is one of the avenues that people invest their money in, for profits. Investors have also confirmed a high ROI upon putting their funds into mutual funds.
It is not everyone that can build a successful business. So, investing in mutual funds is a great alternative for investors. It also minimizes the risk of business collapsing.
It also does not require much capital, unlike some classes of business. So many people have built wealth with just a little capital in mutual funds.
How best to invest in mutual funds?
If you are interested in kick-starting your mutual fund’s journey, below is a step-by-step success guide to invest;
i. Decide to go active or passive.
This is probably one of the first decisions to make in mutual funds investment. It is also one of the important steps to take. As you are about to commence your mutual fund’s journey, do you want to trade actively or passively?
Active management involves trading frequently in a bit to outperform a targeted benchmark or index. Passive management, on the other hand, is market activities that are targeted at matching the index, and not outperforming the same. Going active targets higher returns involves greater risks and requires larger fees.
ii. Calculate your budget.
You need a budget for your mutual fund’s investment and it has to be as clear as possible. Also, you need to strategize on how you intend to achieve your target.
Achieving this depends on your set target in the market, and which mutual fund you are investing in. After achieving the minimum initial investment required, you can then decide on how you intend to continue your mutual fund’s investment journey and adapt to a strategy that is favorable.
iii. Decide where you want to buy from.
This is another decision you need to make. Do you want to buy from the mutual fund’s company directly or through an online brokerage? Decisions, decisions.
To make this decision, you may want to put some factors into consideration; Affordability, choices of funds, the information provided, and the ease of use of the company or brokerage’s app/website.
iv. Note mutual funds fees.
There are always annual fees attached to your mutual fund’s account- be it active or passive. The fee is called the expense ratio. It is meant to cover the management of your fund as well as other costs of running the fund. For example, if your agreed expense ratio is %1, then you will be charged $10 for each $1,000 you invest in the fund.
It is important for you to note and understand this fee as failure to do so may translate to you blindly agreeing to an unfavourable term. Also, be sure to confirm the existence or non-existence of other charges/fees.
v. The management of your portfolio.
It is also important for you to consider how your portfolio will be managed and you run the fund activities.
How often do you intend to reimburse your portfolio? What approach do you wish to employ to trading? These plans and others are vital to your success as an investor.
While it is great to have a plan, the market situation may require that you go back to the drawing board and revisit your plan for necessary adjustments. If the current market situation requires that you tamper with your plan, you may have to.
It is advisable to have a plan but know that the market is volatile and may have you readjusting your plans.