Navigating the world of mutual funds
Understanding mutual funds and how they work.
You might have read or heard about mutual funds before, they’re nothing new as a concept, with the first ones appearing in the 18th century. They’re investment vehicles that work by pooling money from multiple investors to then invest in a diversified portfolio of stocks, bonds or any other type of securities. These types of funds are usually managed by a professional “fund manager” or an investing company specialised in this niche, the managers will take decisions on behalf of the investors and usually take care of the whole process.
There is a mutual fund for everyone, and each one comes with its own investment strategy and risk profile.
1. Common mutual fund categories include:
2. Equity funds: stock focused
3. Bond funds: bonds focused
4. Money market funds: you’ll be investing in short-term, low-risk securities
5. Balanced funds: a mix of stocks and bonds
Mutual funds will fluctuate, as they follow the market, and their returns and risks depend on the performance of the securities in the portfolio.
As you start navigating personal finance and investment, mutual funds emerge as a powerful tool for 20-somethings looking to grow their wealth and achieve their financial goals. At Beewise, we understand the importance of empowering you on your financial journey, and that is why we’re happy to help you shed light on the world of mutual funds and to give you the tools you might need to get started.
Breaking Down Mutual Funds – Tips for beginners
1. Start small
If you’re worried about having little to no money to spare, fret not. Start small by investing manageable amounts in mutual funds, having a tight budget should not scare you from investing.
Take advantage of Beewise’s educational resources. Our app and the articles on our blog provide valuable insights into funds and investment, helping you understand the basics and potential returns. Knowledge is key, and we’re here to help you and support your learning journey.
3. Time-saving investments
For those with busy schedules, mutual funds are a game-changer. Unlike actively managing a stock portfolio, mutual funds are professionally managed. You won’t have to put as much time and energy into caring for your finances.
Are mutual funds safe?
Mutual funds are to be considered generally safe, that is what makes them a popular investment option, especially for younger people who are looking for a diversified approach to investing. The safety of this type of fund hugely depends on the type of assets held within the fund, and the overall market conditions. Market risks are always a possibility, keep that in mind, but the diversification inherent to mutual funds helps to mitigate the impact of stocks or bonds not performing as you would have wished them to.
Can I invest with my friends?
Why not? Investing with your friends or family members can be a collaborative and enjoyable experience, but it’s necessary to approach it with caution. Everyone has different financial goals and different risk tolerances, so individual decisions may vary. Instead of pooling funds from the get go, consider investing in the same funds but individually and after discussing investment strategies and sharing insights.
Red flags to look out for
High fees
Watch out and stay away from mutual funds with exorbitant fees and hidden costs. High expense ratios can eat into your returns over time. Be sure to check the fund’s expense ratio and choose wisely. Wasting money, especially if you’re just getting started, is not an option.
Complex strategies
Try not to overcomplicate your life by avoiding funds with overly complex strategies or investments you don’t fully understand. You don’t need to be an expert, being a bit confused about a new venture is okay, but try to stick to funds that align with your risk tolerance and investment knowledge.
Credit risk
Funds investing in bonds or other debt instruments may be exposed to credit risk if the issuers of those securities fail to meet their obligations
Interest rate risk
Bond funds are particularly sensitive to changes in interest rates. When interest rates rise, bond prices tend to fall, which can impact the value of bond mutual funds.
In times of market stress, some assets held by mutual funds may become less liquid, making it challenging to sell them at desired prices.
How much do I have to rely on other investors when betting my money on a mutual fund? Is it a pyramid scheme-like system that will collapse if not propped up by enough people?
In short, No.
Mutual funds are open-end, which means the fund issues or redeems shares based on something called Net Asset Value (NAV) at the end of each trading day. This means that if some of the investors decide to enter or exit a mutual fund, this typically won’t personally impact your individual investment.
It is important to keep in mind that the prices of mutual funds are not determined by the number of investors chipping in, but rather by the values of the underlying assets in the fund.
The fund’s performance is usually challenged by the changes in the value of the fund’s holding and the fund manager’s decisions.
Redemption and liquidity
If a very large number of investors decide to drop out of the fund and starts redeeming their shares, the fund may have to sell securities to meet these redemption requests. It’s mostly a matter of liquidity, or lack thereof, but it should not directly result in losses for the investors who decide to keep their shares.
Disclaimer: This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
