Are Mutual Funds Investment Safe?
When it comes to our mind about investing the hard earned money, many investments opportunities comes in our consideration. Mutual Funds investment is one of those opportunities, which comes to our mind.
What are the Mutual Funds?
A Mutual Fund is a fund managed by a company that pools money from many investors and invests those money in securities such as stocks, various type of bonds and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Every mutual fund is managed by a professional, called Fund Manager and his role is very crucial. He takes decision about managing the fund and performance of the fund more or less depend upon the efficiency of the Fund Manager. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates. The current value of one unit of the fund is known as NAV (Net Asset Value) of that particular fund.
Why do people buy mutual funds?
What types of mutual funds are there?
What are the benefits and risks of mutual funds?
How to buy and sell mutual funds
Understanding fees
Avoiding fraud
Additional information
Why do people do Mutual Funds Investment?
Mutual funds are a popular choice among investors because they generally offer the following features:
- Professional Management of the Fund by a Fund Manager. The Fund Managers do the research for the investor. They select the securities and continuously monitor the performance of the fund.
- Diversification or the fundamental known as “Don’t put all your eggs in one basket.” Mutual funds typically invest in diversified companies and industries. This helps to minimise your risk if any one company fails.
- Affordability. If you want to invest in a company, you need million rather billions of $ to be part of the company, but you may become part a company rather a sector through mutual funds by investing only few dollar amount as initial investment and subsequent purchases.
- Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current Net Asset Value (NAV). It may attract some charges as applicable.
Types of Mutual Funds Investment
There are four main categories of a Mutual Fund which have their own characteristic.
- Money Market Funds
- Bond Funds
- Stock funds
- Target Date Funds
- Money market funds have relatively low risks. By law, they can invest only in certain high-quality, short-term investments issued by U.S. corporations, and federal, state and local governments.
- Bond funds have higher risks than money market funds because they typically aim to produce higher returns. Because there are many different types of bonds, the risks and rewards of bond funds can vary dramatically.
- Stock funds invest in corporate stocks. Not all stock funds are the same. Some examples are:
- Growth funds focus on stocks that may not pay a regular dividend but have potential for above-average financial gains.
- Income funds invest in stocks that pay regular dividends.
- Index funds track a particular market index such as the Standard & Poor’s 500 Index.
- Sector funds specialize in a particular industry segment.
- Target Date Fund hold a mix of stocks, bonds, and other investments. Over time, the mix gradually shifts according to the fund’s strategy. Target date funds, sometimes known as lifecycle funds, are designed for individuals with particular retirement dates in mind.
Benefits and Risks of Mutual Funds Investment?
Mutual funds offer professional investment management and potential diversification. They also offer three ways to earn money:
- Dividend Payments. A fund may earn income from dividends on stock or interest on bonds. The fund then pays the shareholders nearly all the income, less expenses. You may opt to take the dividend in your account or re-invest the dividend in existing investment, it will increase your number of Units held by you.
- Capital Gains Distributions. The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the fiscal year, the fund distributes these capital gains after deducting any capital losses, to investors.
- Increased NAV. If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV means the higher value of your investment.
All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change. Though there are very low chances of it, since Fund Manager keeps on watching such changes and takes very quick action to safeguard interest of investors. But in principle, such scenario can’t be ruled out.
A fund’s past performance is not as important as you might think because past performance does not predict future returns. But past performance can tell you how volatile or stable a fund has been over a period of time. The more volatile the fund, the higher the investment risk.
How to buy and sell mutual funds
Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for the mutual fund is the fund’s per share net asset value plus any fees charged at the time of purchase, such as sales loads.
Mutual fund shares are “redeemable,” meaning investors can sell the shares back to the fund at any time. The fund usually must send you the payment within seven days.
Before buying shares in a mutual fund, read the prospectus carefully. The prospectus contains information about the mutual fund’s investment objectives, risks, performance, and expenses. It contains following information:
- Investor Objective, Strategies, and Risks
- Fee Table and Performance
- Management, Shareholder Information, and Statement of Additional Information
Know Fee & Charges Before Investing
As with any business, running a Mutual Fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you.
Even small differences in fees can mean large differences in returns over time. For example, if you invested $1,000 in a fund with a 10% annual return and annual operating expenses of 1.5%, after 20 years you would have roughly $4,973. If you invested in a fund with the same performance and expenses of 0.5%, after 20 years you would end up with $6,086.
It takes only few minutes to use a Mutual Fund cost calculator to compute how the costs of different mutual funds add up over time and eat into your returns. There are various calculators available for IOS and android, you may check before investing. Different Mutual Fund Company’s websites also display such items on their website along with performance of different funds launched by them from time to time.
Be Cautious and Avoid Fraud
By law, each Mutual Fund is required to file a prospectus and regular shareholder reports with the Securities & Exchange Commission (SEC). Before you invest, be sure to read the prospectus and the required shareholder reports. Additionally, the investment portfolios of Mutual Funds are managed by separate entities known as “investment advisers” that are registered with the Securities & Exchange Commission (SEC). Always check that the investment adviser or Mutual Fund Distributor is registered at SEC, before investing.