Mutual Fund is one of the popular and growing choices of an investor. It allows investors to benefit from the collective strength of the group (pool). The benefits include:
1. Services of Investment Professionals
An average investor is not well versed in the capital markets or may not have access to adequate information to invest successfully: or may simply not have the time to acquire information and analyze it. By investing through a mutual fund, the investor is able to acquire the services of a team of professionals dedicated to the investment business, whose cost is spread over the entire pool and thus is at a very low cost for the investor.
2. Ability to Diversify
An average investor will normally invest small amounts of money and cannot achieve an adequate level of diversification. An investor of even a small amount in a mutual fund will achieve immediate diversification by becoming a part owner of the entire portfolio of the mutual fund.
3. Ability to invest very small amounts
An investor, who wishes to invest very small amounts, even $ 100 can do so by investing in some mutual funds (normally open-ends). The same amount of $100 will not be entertained by any broker in the capital markets, which are normally the exclusive domain of the rich and wealthy.
4. Ability to multiply savings
It an investor wishes to build up savings of small amounts every month, he does not have to wait to first build up large enough amounts to invest meaningfully: by investing every month in a mutual fund, the investor can make the monthly savings earn and grow as these are accumulated.
5. Ability to diversify price volatility risk
At the point in time when an investor has some funds to invest, the market may be rising (bullish) or declining (bearish); he is never too sure if he is entering the market at the right time. By investing small amounts in mutual funds regularly, the investor is able to average out the fluctuations in the purchase price some investment will be made when the market is high and some when it is low: the average is likely to be at the mid-point.
6. Ability to match investment with risk taking ability
Most investors have their own unique risk taking ability. Retired persons will normally have a low risk taking ability; on the other hand, younger persons or persons with adequate resources are normally able to take higher risk and should therefore be able to benefit from higher potential rewards.
Mutual funds normally offer different investment styles, i.e., there are funds that invest in the stock market and carry a higher potential risk and reward; apart from stock market funds, there are mutual funds that invest in the debt securities, which expose on to lower risk; and then there are mutual funds that invest in the money markets, which expose one to very low risk. Some funds invest in a mix of shares and bonds to give a blend of growth (from shares) and a stable income (from bond).
By allocating one’s savings into several mutual funds, the investor can balance out the investments into a combination that suits the investor’s risk taking ability.
7. Liquidity
Money invested in mutual funds can be redeemed either by selling the shares of a closed-end fund in the market or by simply asking the fund manager for redemption (refund at current market price) in the case of an open-end fund. There are no penalties for early termination of the investment which one may have to suffer in the case of term deposits with banks or other savings schemes.
8. Protection of Regulation
If one invests directly in the capital markets, the rule of caveat emptor or buyer beware applies in its full meaning. However, if one invests in a mutual fund, one is protected by the government-enforcement of good practices by the fund managers.
9. Protection through the Trustee
In the case of unit trust schemes, the trustee, who has to be qualified under the law to act as such, offers additional protection by having complete custody over the assets of the mutual fund. The trustee ensures that the fund manager takes the investment decisions within the defined investment policy of the mutual fund.
Mutual funds have a lot of advantages over other investment securities but a final piece of advice. Please take your time over your investment decisions; do not be pressured by anyone telling you that you are about to miss an exceptional opportunity to make money. It is better to lose an opportunity than to lose your money.