MUTUAL funds and unit trusts are two alternative ways of investing your money. A mutual fund is an investment vehicle that pools together individuals' money and invests it in a collection of stocks and/or bonds. Professional fund managers oversee these funds. On the other hand, a unit trust is a type of mutual fund that sells units. Both of these products present investors with the opportunity to invest in financial markets with limited knowledge of investing, time or money.
Mutual funds have been very popular due to the advantages that they offer. Mutual funds tend to be liquid. Just like an individual stock, a mutual fund allows investors to request that shares be converted into cash at any point in time. By owning shares in a mutual fund, rather than owning individual bonds or stocks, investors are exposed to diversification. This, coupled with expert management, helps to significantly stem the risk faced by investors.
Fund managers usually invest across various companies, countries, asset classes, security types, and risk levels. The specific investment strategy and investment goals are outlined in the prospectus of the fund. The prospectus contains other information that is germane to the fund such as the fund manager's compensation, expenses and sales charges. The prospectus should be read prior to investing in a fund to ensure that a particular fund is right for you. Investors should also explore the fundamentals of a fund before making a decision on whether to invest or not.
There are three basic types of mutual funds. These are equity funds, fixed income funds and money market funds. All mutual funds are variations of these three asset classes. Equity funds focus on investing in stocks, while money market funds consist of short-term debt instruments. Money market funds do not have the best returns, however, they are good for the preservation of capital. Fixed income, as the name states, focuses on investing in fixed income securities such as bonds.
Investors can profit from dividends earned on stocks and interest on the bonds that the fund invests in. Depending on the stipulations of the fund's profile, investors may receive regular payouts in the form of distributions.
Additionally, investors can benefit if the fund sells securities that have appreciated in price. The capital gains from securities are also passed on to investors in the form of distributions. Additionally, if the fund's holding increases in price, and is not sold by the fund manager, then the fund's shares or units will also increase in value. Of note, the performance of a mutual fund all depends on the performance of the underlying assets that have been invested in.
These funds do have a few disadvantages. The cost associated with a fund may significantly affect returns. Creating, distributing, and running a mutual fund can be an expensive operation. Everything from the manager's salary to the investors' statements costs money, and these expenses are passed on to the investors. Since fees vary widely from fund to fund, failing to take fees into consideration can have negative long-term consequences. Keep in mind that every dollar spent on fees is a dollar that is not invested and has no opportunity to grow over time.
An example of a mutual fund is CI Global Health Sciences Corporate Class. It is a US$-denominated Canadian Investment Fund, with medium volatility, that primarily invests in large value stocks and has interests in Novartis AG, Merck & Company Inc, and Gilead Sciences Inc. It also has its investments spread out over several countries, which include France, Ireland, Singapore, and Switzerland. Of note, a US$10,000 investment in the fund in 2003 has returned US$35,083 or 250.83 per cent over a nine-year period.
Even though mutual funds provide diversification and rely on advanced research and analysis, there are no guarantees against loss. Today's markets tend to move quickly, and even the best mutual funds managers may underperform at times, which can result in losses for investors. This means that investors should continually monitor the funds that they have invested in and work closely with a wealth advisor to ensure that there remain on track to achieve their investment goals.
Emile Wallace-Waddell is the Research Administrator at Stocks & Securities Limited and can be contacted via email@example.com