What are Mutual Funds?
Mutual funds are a form of collective investment that allows
investors with similar investment objectives to pool their funds to be
invested in a portfolio of securities or other assets.
A professional fund manager then invests the pooled funds in a
portfolio which may include the asset classes listed below:
Cash
Bonds & Deposits
Stocks
Properties
Commodities
Unit holders do not purchase the securities in the portfolio
directly. Ownership of the fund is divided into units of entitlement.
As the fund increases or decreases in value, the value of each unit
increases or decreases accordingly.The number of units held depends on
the unit purchase price at the time of investment and the amount of
money invested.
The return on investment of unit holders is usually in the form of
income distribution and capital appreciation, derived from the pool of
assets supporting the fund. Each unit earns an equal return,
determined by the level of distribution and/or capital appreciation in
any one period.
Mutual funds investors are typically those with savings to invest, who
neither have the time nor the inclination to hold portfolios of direct
investments or shares. Rather, they prefer to invest in a secure,
reputable investment vehicle which suits their purposes. Mutual funds
allow investors to have easy access to a wide range of investment
exposures not normally available to them.
As investors seek to maximise returns on their financial resources,
mutual funds provide an ideal way for them to gain exposure to
investments that, in the long run, should produce returns superior to
cash savings and fixed deposit investments.
The cost of these potentially higher returns is of course the risk that
accompanies the investment. In the short run, the certainty of
investment returns of most mutuals funds products is less than those
offered by fixed deposits. However, in the medium to long term (3-20
years), mutual funds investments generally provide superior returns at
acceptable levels of risk.