Mutual funds according Wikipedia is a” professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.”
A lay man assumes that an investment expert or a mutual fund (MF) manager is invincible.
But is it really true? Can the mutual fund manager beat the markets, year after year? Can the fund manager’s perform better than the common investor’s? Is the fund manager invincible truly?
Most likely not. If it was so, why do the most of the well managed funds perform less than the passively constructed stock indices, over extended periods of time, globally?.
So, just so you know, in spite of all the added attributes described above, there are problems with mutual funds which actually prevent them from outsmarting an investor on the street or the index.
A mutual fund consists of stocks and bonds. Investors in a mutual fund buy shares and receive a proportional percentage of the fund’s earnings. These earnings can be put back into the fund or paid to the investors.
Mutual funds can be profitable for amateur investors who don’t have the time to pay attention to their investments. A mutual fund provides a broader scope of view.
Investing in these funds allows you to make reference to your fund manager. Besides many other investments, it’s been said that “mutual funds that do not have a retirement package such as a 401(k) or an IRA are very liquid”.
Liquidity refers to the enablement of an investor to cash out of an investment without incurring a penalty.
The prize to pay in mutual funds is that you have to give up some equity in return for the benefits.
You have no power to choose what investments will go into the fund because that is the decision of the fund manager.
Some funds place charges on sales called a “load,” for the opportunity to invest .
NET ASSET VALUE
The net asset value is the price per share that you pay to invest in the mutual fund. It does not include any of the fees that may also be applicable.
It’s simply put as the difference between the value of the liability from the value of the asset.
Net asset value is not really a good pointer for fund performance, because mutual funds are meant to dispense of the money they gather.
Your earnings can be quite much while the net asset value remains the same.
SELECTING MUTUAL FUNDS AGAINST COMMON STOCK
One of the really cool features of mutual funds is that they give the investor the opportunity of creating portfolio of securities.
When investing in mutual funds, you only need a couple of funds to reduce or manage the extent of risk by diversifying the funds whereas when investing in stock, you will require about 8 or more companies to buy in other to manage the investment overall risk.
There are some risks that are associated with buying of stocks or mutual funds,some of these risks include inflation, overcapacity, interest rates and so on.
Then purchasing a stock in a company, you are also exposed to the risk of the company’s operating performance i.e, your experience with the company as an investor is based on their performance.
For example, if a company makes a wrong decision, the effect of that decision will not affect the company that it competes with, it will affect its own stock price.
Mutual funds on the other hand contains bonds,stocks and even cash therefore its possible to reduce the risk that is associated with just owning a single company.
In a nut shell, the risk is reduces in a mutual fund as a result of the diversification that it offers
It is also important to note that mutual funds fall under some categories with are
- Index funds
- Specialty funds
Index funds according to Investopedia are “funds that are made to match the components of a market index such as the standard and poor’s 500 index”.
One good thing about index funds is that you can invest in a lot of securities which eliminates all individual stock risk.
In most cases, if done well an index fund can produce the same result as the index it was meant to track
One of the cons of index funds is that it does not always live up to the expectations of the investor.
This is because when shareholders buy and receive their shares, the management team is always trying to sustain the portfolio so it doesn’t drift away from the index its tracking. This leads to the scaling up of expenses in the trade.
These are funds that occurs when one tries to copy a particular company like natural resources, precious metals, real estate and so on.
Specialty funds have a high industry risk potential but with mutual funds it can be reduced.