Is investing in mutual funds a good idea? – that will be the topic of today’s article.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).
General Information
Mutual funds happen to be one of the most common types of investment vehicles preferred by most investors.
You might have heard now and then about them, and yet, most of you may not have made the decision on whether or not to invest in them.
To clear that confusion out of your mind, today I will discuss some key information related to mutual funds.
Adding to that, I would also state the benefits of investing with me on par with investing directly in mutual funds.
These questions are usually asked by most of my readers.
However, I am going to provide the details in an extremely simple manner so that even beginners with zero knowledge about these can be able to understand everything about them.
What is a mutual fund?
Let’s begin with that.
A mutual fund is a type of financial instrument that allows one to make an investment in different types of securities.
How do they work?
In general, various investors start putting up their funds (capital) in a mutual fund. After doing so, the pool of funds, which is nothing but the collection of the entire money, is put into other assets.
Who does that?
Well, a certified financial professional with extensive knowledge of securities and investments takes care of the process.
The professional who tends to deal with the activity related to such investments, i.e., mutual funds, goes by the name of a fund manager.
What is a fund company?
The financial company/firm that offers the opportunity of investing in mutual funds is generally known as a fund company.
Are a fund company and a fund provider the same?
Well, a fund company is typically a firm that only focuses on offering investments related to mutual funds.
On the other hand, fund provider is a term used to collectively refer to any entity that offers services related to mutual funds.
For example, if you have acquired services related to mutual funds through an online broker, then that broker would be considered a fund provider.
Where does the money go?
As said previously, all the pooled funds are invested into different types of investment assets.
The most common types of assets in which mutual funds invest are as follows.
— Stocks
— Bonds
— Short-term debt
— Precious metals
— Money market instruments
These are just a few of the investment assets in which mutual funds get invested.
How do I get returns after investing in mutual funds?
After making an investment in mutual funds, whether or not your profits is dependent on how the fund performs.
For instance, when the securities, let’s assume stocks, in which the fund invested have performed well, then the fund is said to have performed well.
In such a circumstance, you and all other investors would equally distribute the profits that are derived from it.
There are different ways how you can actually make money from investing in mutual funds.
First, you can generally earn dividends if the fund is invested in stocks, and at the same time, you will receive interest if it is invested in bonds.
Secondly, you will be able to make money when the value of the securities in the mutual fund increases. If that’s the case, then you are offered the profits that arise after the funds sell those underlying assets.
Finally, you will also be allowed to gain returns when the fund scheme experiences an increase in its value. In this situation, you can sell your holdings regarding that mutual fund.
What’s the advantage of a mutual fund for doing so? (or) How does the fund provider make money by offering mutual funds?
There are two ways a mutual fund company will make money by offering its mutual fund schemes.
The first and most common method is through charging the investors with a percentage, and this percentage is based on the investor’s assets under management.
In much simpler terms, mutual funds will charge a percentage of the total money you invest in them.
Another method they make money is by charging a sales commission, which is known as a load. This sales commission is generally charged when the investors try to make a fund purchase or when they try to redeem their funds.
Fund fees are generally known by the name of “Expense Ratio”, which can be around 0% to 2% depending on certain factors.
The general factors that influence the expense ratio are the operational costs of the specific fund as well as the investment strategy.
Operational costs would refer to the costs involved with the handling of funds, for example paying the fund manager.
It is mandatory for a fund to be transparent about its fee structure to existing investors as well as potential clients.
What is an expense ratio?
Expense ratios, for a mutual fund, are calculated when the total assets under management are divided by the total fund fees. By total fund fees, it is implied that both management fees, as well as operational charges, get included.
Based on an investor’s point of view, a fund is said to have a good expense ratio when it is around 0.5% to 0.7%, which is typically less than 1%.
Any expense ratio that is more than 1% would be deemed a high expense ratio and may not be beneficial for the investors (especially, if it is around 1.5% to 2%).
Now, having covered most of the frequently asked questions, I will get to some other information about mutual funds.
Types of mutual funds
Unlike most internet sources that have filled your head by talking about the types of mutual funds and made you confused, I will try to make you understand them in a simple manner.
First of all, based on the portfolio management strategy, mutual funds are of two types, which are actively managed funds and passively managed funds.
Let’s know a bit more about actively managed funds and passively managed funds.
Actively Managed Funds
Most people can understand the meaning of these funds by taking a close look at the name itself.
Actively managed funds are the types of funds that involve regular activity from a fund manager.
This means the fund manager will constantly monitor these funds and make the necessary asset allocations and reallocations on a regular basis.
For example, when a certain stock in the underlying portfolio of a mutual fund decreases in value, then the fund manager would replace it with another stock.
Such active involvement from the fund manager fetched the name actively managed funds.
Actively managed funds usually have a higher expense ratio as the fund company would have to pay the fund manager for the services it acquires.
Passively Managed Funds
It is nothing but the opposite of an actively managed fund, which means that there will not be active involvement from a fund manager.
These mutual funds usually track the performance of a certain index and don’t make any regular asset reallocation unless something changes in the benchmark index.
Because there is no involvement of a fund manager, passive mutual funds usually come with a low expense ratio.
Now, based on the structure of the organization, mutual funds are again classified into three types, which have been described below.
Open-Ended Funds
Open-ended funds, also known as open-end funds, can issue new shares any time they want, and at the same time, redeem the existing shares.
The price of such funds is updated on a daily basis depending on their net asset value.
Closed-Ended Funds
Closed-ended funds, also known as closed-end funds, offer a limited number of shares, that too only during the time of their initial public offering (IPO).
Interval Funds
Interval funds are those that periodically offer to buy back the existing shares from their shareholders.
However, these funds do not get traded on the secondary market making them illiquid.
Based on the investment objective of the mutual fund, it can again be classified into three different types, which have been listed below.
Growth Funds
A growth fund would usually consist of stocks from different sectors, all of which, are selected with a primary objective of potential growth.
Here growth would refer to the capital appreciation of the stocks, and such mutual funds may offer little dividends or no dividends at all.
Income Funds
Income funds are mutual funds that generally prioritize underlying assets based on their interest-paying or dividend pay-out capabilities.
In most cases, income funds usually consist of a portfolio of debt securities such as bonds, money market instruments, etc.
However, they may also consist of underlying assets such as dividend-paying stocks.
Income funds come with lower risk compared to growth funds as they don’t focus excessively on capital appreciation.
Liquidity Funds
These are the mutual fund schemes that only invest in debt securities and money market investments that have a maturity period that does not exceed 91 days.
Finally, based on the underlying assets, mutual funds can again be classified into different types.
Equity Funds
These are the types of mutual funds that only consist of equity stocks as underlying assets.
Debt Funds
Debt funds only invest in the debt securities such as government bonds, corporate bonds, money market instruments, etc.
Hybrid Funds
Unlike equity funds and debt funds, hybrid funds tend to invest in more than one type of asset class.
Hybrid funds may also be known as balanced mutual funds, and the underlying assets of a hybrid fund are dependent on the investment strategy of the fund scheme.
Multi-Asset Funds
These are the hybrid funds that have an underlying portfolio of several asset classes.
You might also come across asset-specific mutual funds, which only have underlying assets of a single type of asset class.
Some other types of funds, which you might hear about are listed below.
Overseas Funds
The funds that invest in securities based outside of an investor’s country of residence are known as overseas funds, which may also be known as foreign funds.
ETFs
Exchanges Traded Funds, which are also known as ETFs, are funds that are traded in a stock exchange similar to stocks.
Funds of Funds
Funds of Funds are the type of funds, which have other types of funds as underlying securities.
Advantages and Disadvantages
Having discussed the important types of mutual funds, we will now focus on the benefits and drawbacks of investing in mutual funds. Let’s begin with the pros.
— There is no need for you to actively handle all the assets underlying the fund’s portfolio. Instead, you will be paying a professional to take care of all that activity for you.
If you could access a fund that has a low expense ratio, you would literally be paying a small fee for the returns you’ll get.
— Passively managed funds often come with a low expense ratio and track a benchmark index, and in most cases, these benchmark indexes are comprised of the top companies (or other securities).
— Investors can opt for dividend reinvestment where all the profits attained by them in the form of dividends can be reinvested into the fund.
Through dividend reinvestment, individuals are able to boost the growth of their investments.
— In most cases, investing in mutual funds, especially hybrid mutual funds will offer a wide range of asset diversification.
— Even when you have invested in an asset-specific mutual fund, you would be investing in multiple securities, which are in the underlying portfolio of the fund scheme.
Generally, mutual funds invest in 50 to 200 different securities based on the type of fund chosen. Not only that, but most stock index funds would offer exposure to more than 1,000 individual stock positions.
— Mutual funds are not complex investment vehicles such as CFDs or forex, and therefore, anyone can easily understand and access them.
— The minimum investment requirement is also comparatively low for most mutual funds allowing greater access to investors.
— As mutual funds are traded only once per day, which is according to the closing net asset value (NAV), fluctuations are rare.
Having discussed most of the advantages of mutual funds, let us now take a look at the drawbacks.
— Not all mutual funds come with a low expense ratio, and when the expense ratio is high, the costs will eat up most of the profits derived.
— Adding to the expense ratio, investors should also be on the lookout for the 12b-1 advertising fees or sales charges. You can access fund companies that do not have a sales charge, but it does not imply that it’s always possible.
— Not all fund managers may be efficient as you might think, and at certain times, there can be a possibility for things like churning, turnover, and window dressing.
The fund might also perform negatively when the fund manager trades unnecessarily, replaces the assets frequently, or sells in unwanted situations.
— Taxes with mutual funds are generally on the higher edge due to factors such as turnover, redemptions, gains, and losses in the security holdings.
— When the mutual fund is performing well in the noon and you wanted to sell your shares, you would still be receiving the closing NAV on the fund trade.
It is not like day trading where you can time the market and get off when it feels profitable.
Are Mutual Funds good?
Yes, I can say with a positive tone that mutual funds do offer a great range of diversification and good returns.
By choosing the right fund scheme, you may be able to access profits on a greater scale.
However, you should also remember what I told you about the risks of getting involved with the fees and taxes.
It does not end there because when you invest in an actively managed mutual fund, the fund’s performance depends solely on the investment decisions taken by the fund manager.
If the fund manager happens makes any wrong decisions because of poor judgment, you will have to miss out on the profits.
Furthermore, the fund manager would be replacing the underlying assets based on their judgment and not according to your opinion.
How can you benefit from the services I offer?
Like I said at the beginning of the article, I will now shed some light on why investing with me is better than investing in mutual funds (on your own).
To begin with, I am a professional financial planner and wealth management specialist, and I cater to my clients according to their needs.
This means I or my team of investment professionals will get in contact with you to devise an investment strategy based on your specific goals and objectives.
Another big advantage is that I charge fewer fees compared to what you might be paying when a fund has a normal expense ratio.
Adding to that, I also offer great discounts on the fees for those who invest larger amounts and those who stay with me in the longer run.
If you are from a country, where you think the investments don’t seem profitable, you don’t have to worry about that.
This is because I accept clients on a global scale, with a few exceptions, and offer them lucrative investment services.
The fund manager’s primary goal would be getting better returns for the fund scheme, and for that, it is likely for them to make poor decisions based on bad judgment.
This is usually done out of haste to try and improve the returns for the fund scheme.
Unlike them, I usually focus on the long term, which is extremely beneficial for those who wish to invest toward their retirement or gain economic security.
I offer investment solutions that include low-cost ETFs as well as other investment assets that one cannot access unless they are muti-millionaire.
Finally, most of you may have the time to take of your mutual fund investments, whereas some of you may not.
Those who have the necessary time at hand might lack the necessary knowledge or skills to handle the investments on their own.
For such people, I can offer sound investing strategies, which allow them to attain financial freedom and reach their investment goals.
Especially, if you are an expat looking for a great investment service or if you are a high-net-worth individual seeking to safeguard and grow your wealth, then I can be of the utmost assistance.
You can even have a look at my client testimonials to find out that I have provided best-in-class services to almost all of my clients.
You can either make a one-time investment as a lump sum or you can start investing on a monthly basis to acquire my services.
Therefore, I think that most people can benefit from the services I offer instead of DIY investing in mutual funds.
Yes, mutual funds are a great investment unless you have all the necessary skills and expertise to manage your investments on your own.
Instead of that, you can always try to improve your financial situation by investing with me.
If you are not sure whether or not my wealth management or investment services can be profitable to you, then you can feel free to get in contact with me.
I strongly hope that the information provided in this article helped find the information you needed.
All the information provided in this article is for educational purposes and I do not endorse or stand against investments made in mutual funds.
You should remember that this article is to prove how you can benefit from services rather than investing on your own. If you want to see a specific review of an existing fund check out my Fundsupermarket review where you can invest in many fund types including mutual funds..
This is specifically targeted towards beginner-level investors and strictly not for advanced traders or investors.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
