Skip to content

What Is Mutual Fund And Its Benefits

  • by

What Is Mutual Fund And Its Benefits

What is Mutual Fund and its benefits?

Mutual funds, also known as investment funds, are a type of collective investment vehicle, which gathers money from many investors to conduct investments in financial markets. In the below article, we will find out what is mutual fund and its benefits.

See Also :

What is Mutual Fund?

Mutual funds is a simple means of investment in which everyone with the same long-term investment objective raises their funds. Then they appoint an investment manager to manage the fund according to their investment objectives namely investing in stocks and/or in fixed income instruments. The wealth/assets of a mutual fund do not belong to its investment manager, it only manages the assets on behalf of investors. The assets belong to investors whose holdings are expressed in the mutual fund’s share unit.

Why invest in Mutual Funds?

The reason is the same as why people are interested in starting a business, that is to earn additional money in the long term and to save for the preparation of the future.

Another reason is to avoid complex financial problems by giving it to professional managers, on the other hand we can achieve attractive profits after deducting the inflation rate.

Investing in mutual funds is more profitable, because the return rate is higher than saving in conventional banks or deposits in banks.

What are the benefits of investing in Mutual Funds?

  1. Professional Manager

Mutual Fund is managed by a reliable investment manager, looking at the best investment opportunity for the mutual fund. In principle, investment managers work hard to research thousands of investment opportunities for shareholders/mutual fund units holders. While the investment choice itself is influenced by the investment objectives of the mutual fund.

  1. Liquidity

What is meant by liquidity here is the ability to manage money in and out of mutual funds. In this case the most suitable is the Mutual Fund for stocks that have been listed in the market where transactions occur every day, unlike time deposits or certificates of deposit of a certain period.

  1. Diversification

Diversification is an investment term where you do not place all your funds in one investment opportunity, with the intention of dividing the risk. Investment managers choose to share a variety of stocks, so that the performance of one stock will not affect the overall performance of mutual funds. In general, mutual funds have approximately 30 to 60 types of stocks from various companies.

Compare the above situation if you buy your own shares directly, you may only be able to buy one type of stock, the value of your portfolio will certainly depend heavily on the performance of the share price. If the performance is good, you will benefit, but if the share price falls, you will get a loss of a percentage as much as your investment. Diversification provides balance by providing maximum limits on investments in a type of stock.

Examples of advantages of diversification:

If you invest US$ 5,000 in a mutual fund you have several shares and 1% of the assets are invested in XYZ company shares. The next day, the biggest competitor of the company XYZ lost the competition. The share value of XYZ has decreased by 25%. If you invest all your money in XYZ shares, then your US$ 5,000 will drop to US$ 3,750. But in mutual funds, where XYZ shares are only 1% only, the price decrease has little effect.

How is mutual fund ownership and stock price?

Mutual fund ownership is through a unit of shares. Where you as an investor have a certain number of units of mutual funds, depending on how much funds you invest in the mutual fund. Investors will get a share of mutual fund profits or losses every time. Each mutual fund has a so-called share price or commonly called Net Assets Value which is the value of each unit of mutual fund shares. Most mutual funds calculate their share price daily or weekly, as the value of the stocks in the mutual fund portfolio changes in price daily following the movements of stocks in the capital market and money market. The share price of a mutual fund is calculated by dividing the portfolio value in the mutual fund by the number of shares outstanding from the mutual fund. Example:

XYZ mutual fund has a total investment value of US$ 2000000 while the number of shares outstanding is 5000 shares, then the share price per unit of ABC mutual fund is US$ 400.

Example: Impact of changes in mutual fund share price

In January, you invested $10 Million in a mutual fund with a per unit price of $10,000 then the number of mutual fund shares you have is 1,000 units.

In March, the share prices decreased, then the mutual fund price per unit dropped to $9,000, you still have 1,000 shares but the total value of your investment is now $9 million.

In June the price of mutual funds per unit rose to $11,000, meaning your investment increased, where the number of units you have remains 1,000 units with a total investment value of $11 million.

Types of Mutual Funds

In general, all mutual funds have similarities in structure, but differ in purpose. Some mutual funds emphasize security and stability, while others emphasize regular income, and others for long-term growth.

Therefore, the important thing is to set your goals before choosing a mutual fund.

  1. Fixed Income Fund: More stable

Namely mutual funds that invest in good quality fixed income instruments such as certificates of deposit (CD), Commercial Paper (CP), and bond certificates issued by private companies, state-owned enterprises, governments, etc. These instruments provide higher interest rates than bank savings but remain conservative. Income mutual funds are still suitable for people who want to invest short-term or who do not want to risk losing some of their investment value. But you can’t expect to make a big profit when you consider the annual rate of inflation.

  1. Equity Fund: more long-term

Stock mutual funds typically invest their funds in shares listed in the company, which represents ownership in the company. Stock mutual funds are best suited for people who want to invest long-term, for a few years maybe even a few decades.

The idea behind stock mutual funds is that stock prices tend to rise and fall in the short term, but history shows that stock mutual funds generate greater returns in the long run compared to investments in Fixed income. So, while your investment in stock mutual funds decreases or increases in value every day, in the long run the result will be greater than you invest it in money market mutual funds or mixed mutual funds, especially compared to the inflation rate each year.

  1. Balance Fund: combination of the two above

Mixed mutual funds invest in both short-term fixed income instruments and in company shares listed on the exchange.

This type of mutual fund optimizes its profits through stocks in the capital market, on the other hand as a buffer is invested through fixed income instruments.

  1. Sharia Mutual Funds

Sharia-based (Islamic) mutual funds.

  1. Protected Mutual Funds

Tips for choosing Mutual Funds

There are two things that investors avoid the most, namely: huge losses and regrets.

You certainly do not want to regret having a large investment which do not give the appropriate results, and on the other hand you do not have investments that are proven to provide better results. Everyone wants to get the “best investment” and variety, in that rule mutual funds are established, namely for different investment purposes from investors. So the first step is to determine the type of mutual fund that suits your needs, investment period, and how you manage your own finances.

All investors, both beginners and experienced, start their investment steps with the same goals as saving for retirement or for tuition fees, maintaining existing wealth, and earning income. In this case you must determine your investment objectives and what risks you want.

As discussed earlier, the more time than the money you have, then you should choose a potentially larger mutual fund in the long run, because you do not need to think too much about price fluctuations in the short term.

Tips on choosing an Investment Manager

Once you have decided on the type of mutual fund that suits your goals, the next step is to choose an investment manager.

There are a few things you need to pay attention to:

  1. Trust – Can be based on the reputation or size of the company, as well as who is the group behind it.
  2. Experience – In this case what needs to be seen is their performance in the management of mutual funds that already exist on them, whether consistent enough for a long period of time.

This is important, because good performance in a short span of time does not necessarily describe its performance over a long period of time.

So go ahead and choose the best mutual fund for yourself.

Health Tips – How to boost your Immunity

Read Also :

Tags: