Investing, like that balanced diet we know is good for us but is overwhelming to cook and some people would rather settle for noodles and takeout. There are so many investment options from stocks, bonds, real estate, and crypto to ETFs, we sometimes do not know which to do or how to balance them.
Mutual funds make these decisions for you. The easiest description of a mutual fund is a pool of money from several investors, this money is then invested in different financial instruments. Each investor owns a unit of this larger investment that is managed by asset management companies or professional fund managers. Mutual funds assess the risk profile and goal objective when choosing the securities to pool together.
The first and primary advantage is diversification, it’s common knowledge that reducing portfolio risk is majorly through diversification. Instead of putting your money into one investment vehicle, spreading it across various securities with low correlation hedges against the risk of one of them failing. Mutual funds help to do just that, considering it is a pool of funds invested into a combination of investment vehicles.
Another benefit is it helps outsource decision-making to the experts (fund managers). You conveniently do not have to go through the research and direct purchase process of investing. Although having an expert handle things comes at a cost, mutual funds often require a charge fee for the fund managers (depending on the fund it can range from 0.5 to 4 per cent). However, this fee is divided and paid by all investors in the fund, one of the economies of scale of investing with a group of others.
Fun fact
The asset value of mutual funds in Nigeria has risen by 11.04% in the first half of 2022 from the corresponding period in 2021. The increased involvement of investors is due to more awareness and impact on capital markets in recent times.
In comparison to the inflation rate, the performance of mutual funds in this period indicates a conservative approach to management. This may reflect the investing environment or strategy used by the firms as based on the funds’ specifications, certain investments may be out of bounds.
To learn
Warren Buffett once said, “Diversification is protection against ignorance”. Truth is that most of us do not have the time and resources needed to do our own due diligence on every investment we make, but investing is still important to our financial success, so investing in mutual funds provides us access to people who have the expertise and time dedicated to giving us the best returns for our money.
That does not mean that you put your money in the first mutual fund that comes your way, basic background checks are still required, these include, whether the fund licensed, what the fee structure is, the historical return, and the risk portfolio. These questions and others, as we have highlighted before, are best answered with the help of a registered financial planner.
Investing is key to financial freedom, and mutual funds are a great place to start for beginners.