Understanding Mutual Funds

Mutual funds

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What is a fund?

A fund is explained as a pool that contains a number of securities such as shares, bonds, money market etc. The fund is owned by investors

A mutual fund is a professionally managed fund. A fund containing a number of securities is owned by shareholders for the purpose of making a gain. The financial securities are owned by investors from all over and each investor has a portion of the holding of the fund.

Advantages

Professional management: This type of funds is managed by professionals who are in charge of picking securities and making sure that the fund is profitable. This sort of investment is suitable for people who don’t have the time, a lot of money or expertise to manage a portfolio.

Diversification: A diversified portfolio contains a variety of financial securities e.g. stocks, bonds, money market fund etc. The investment risk is minimized, because if there is a loss in one security, there will probably be a gain in another which offsets the loss. A typical fund has a large number of different securities. It is very expensive for just an individual to create such a diversified portfolio.

Liquidity: A mutual fund is fairly liquid, at any point if you want to cash your holdings, you can request that your shares be converted to cash

Economies of scale: This is the cost advantage the enterprise obtains because of the size, output or scale of operations since mutual fund managers buy and sell large amount of securities. The transaction cost is low compared to an individual.

Earning: Depending on the fund you have invested in, income is earned from dividends and or interest from bonds. Also, if the fund makes a profit from selling a security that has appreciated in value, this is distributed to the fund shareholders.

Disadvantages

Professional management: there is a debate as to whether or not professional managers actually manage the fund for the interest of the shareholders to increase profitability or for their own managerial benefits. The issue here is that whether or not the fund makes a gain, the managers still get paid.

Fees: A mutual fund involves a lot of fees, from the creating fee, distribution and the running of the fund. The investor pays the fees. Every pound spent has no opportunity to grow overtime, so it is important to take this into consideration before you invest in mutual funds.

Tax: if you are concerned about tax, you need to do more research n how to mitigate taxes. When the fund manager sells a security, a capital gains tax is triggered. It is important to speak to a fund manager for more advice on taxes.

As at September 2015 the top open-end managers in US were

The Vanguard group – https://investor.vanguard.com/corporate-portal/

Fidelity Investments – https://www.fidelity.com/mutual-funds/overview

America funds – https://www.americanfunds.com/

JP Morgan Chase – https://www.jpmorganmf.com/wps/portal/

T.ROWE price – https://www3.troweprice.com/usis/iinvestor/en/mutual-funds.html?van=funds

Blackrock – www.blackrock.com/UK

 

Reference

investopedia.com

fidelity.com

https://en.wikipedia.org/wiki/Mutual_fund

www.murraycoulterandassociates.com

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