YOU may be asking “what is a mutual fund and why should I invest in it?” Simply, a mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors. These funds are used to purchase securities such as stocks, bonds, money market instruments and commodities. The type of assets included in the fund will depend on the fund’s mandate and investment strategy.

There are several advantages to a mutual fund, the first being diversification. Mutual funds provide the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios. Simply purchasing one mutual fund might not give you adequate diversification. For example, investing in an oil and energy mutual fund might spread your money over 50 companies, but if energy prices fall on the market, your portfolio will likely suffer.

The second advantage is that mutual funds are able to take advantage of their economies of scale, thereby reducing transaction costs for investors. When you buy a mutual fund, you are able to diversify without the numerous commission charges that you would incur if you had to buy all the securities needed for adequate diversification. In addition, you would have to pay more transaction fees every time you wanted to modify your portfolio. With mutual funds, you can gain exposure on a much larger scale with less money invested.

Another advantage of mutual funds is the ability to get in and out with relative ease. Mutual funds are easily tradable and very liquid, thereby providing low bid and ask spreads. This liquidity is appealing to investors. A net asset value (NAV) computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio’s securities. Because mutual funds distribute virtually all their income and realised capital gains to fund shareholders, a mutual fund’s NAV is not the best measure of performance. It is better to compare funds and evaluate their performance based on the annual total return.

When you buy a mutual fund, you are also choosing a professional money manager. This manager will use the money in the fund to buy and sell securities that he or she has carefully researched. When selecting a manager, it is important to look at the track record and performance of the fund, and compare it to its peers. A fund that historically recovered after significant market corrections is a testament to a well-managed fund.

Another feature of the fund is flexibility. Your wealth advisor or financial planner can rebalance your portfolio or transfer your holdings to another fund that shows better management and performance during the period of your investment.

There are a wide variety of funds ranging from Canadian, Income, US Equity, Specialty Equity and Global and International funds. For clients interested in investing primarily in Canadian Banks such as Bank of Nova Scotia but not in Jamaican currency, the Canadian Investment Corporate Class Fund has 28.9 per cent of the fund in the financial sector and 19 per cent in the Energy Sector. The Signature Global Energy Fund has had an annual compounded return of 11.93 per cent over the last ten years. CI Investments received 21 awards recognising the best investments funds for 2013. Of note, CI Mutual Funds are fully approved by the Financial Services Commission (FSC) in Jamaica.

Whether you are aggressive, moderate or conservative, there are funds to suit each type of investor. If you are interested in pharmaceutical companies or the international health sector, the CI Global Health Sciences Corporate Fund has had a 95.7 per cent return from 2010 to end of 2013. For clients looking to invest in technology companies such as Apple, Google and Microsoft to name a few, the Signature Global Science and Technology Corporate Class had a 144 per cent return from 2009 to 2013. The CI American Value Corporate Class invests primarily in undervalued companies such as Time Warner Inc and Exxon Mobil had an annual return of 31 per cent in 2013. The Signature High Income Corporate Class invests in Canadian Corporate Bonds and high-yielding equity securities had a 53.7 per cent return from 2008 to December 2013.

These funds can also be used as investments for your child’s education. When you consider that the Jamaican dollar has devalued from $106 to $112 in six months (December 2013 to June 2014). These funds are a great way to hedge against further devaluation, inflation and to preserve capital. The minimum investment is US$500 or CDN$500 and you can make regular investments in these funds for as little as US or CDN$50.

As with any investment, there are risks involved in buying mutual funds.

These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. Funds are also affected by global conditions such as the European recession in 2011 when all funds declined. As with any or most investments if you closed or withdrew a portion of the principal investment prior to the maturity you would pay a fee and that also applies to mutual funds. However, when you consider that some funds during 2013 had gains ranging from 20 per cent to 53 per cent you would still make a considerable capital gain.

Deborah Vieira is a wealth advisor at Stocksand Securities Limited. Contact: dvieira@sslinvest.com