Investing in mutual funds
Mutual funds as investment solutions
A mutual fund is made up of a pool of money from many investors which an investment management firm invests into stocks, bonds or other financial assets. The collective financial strength of these investors makes it possible to make investments across sectors, industries and markets. When you invest in a mutual fund you own a proportion of every investment in it.
For retail investors, mutual funds can be a smart and cost-effective way to invest as many funds have affordable minimum investment requirements. Buying shares in a fund is also an easy way to diversify your portfolio and spread risk.
A fund that comprises more than one asset class, for example bonds and equities, can be termed as a balanced fund or an asset allocation fund.
Benefits of investing in a fund include:
- Expertise – Fund managers do the research for you, select the securities and monitor their performance.
- Diversification – Mutual funds can invest in a range of companies and industries globally. This allows more control on the risk and return ratio.
- Liquidity – Just like an individual stock, most mutual funds allow you to convert your investments into cash at any time.
- Simplicity – Many fund distributors are available to retail customers, including retail banks and fund platforms.
In any investment you make, there is a trade-off between risk and return. A fund that promises the potential of higher returns usually comes with higher risk. On the flip side, a fund with a low risk level might not deliver high enough returns to help you reach your financial goals.