One major challenge faced by any individual who is interested in investing is deciding among the myriad of investment options available. The options available to a potential investor include shares, bonds, money market securities, real estate investments and a portfolio of various combinations of these securities. All these securities have their own set of advantages and challenges.
Mutual funds, as an investment option, have become increasingly popular since their creation but the question is “why should you, a potential investor, give mutual funds special consideration over other securities?” To help you decide whether mutual funds are best for you and your situation, we are going to first look at what mutual funds are and then look at some reasons mutual funds are worth your consideration.
What Are Mutual Funds?
A mutual fund is a collective investment vehicle. What that means essentially is, a mutual fund pools funds from many investors and invests in securities such as stocks, bonds, money market instruments and similar assets on their behalf. Mutual funds are professionally managed by fund managers who have the staff and technical know-how to invest the funds effectively. The fund manager has the responsibility to invest the fund’s capital and produce superior returns for the fund’s investors.
Types of Mutual funds
Mutual funds are either closed-end or open-end. With a closed-end fund, it is registered as an investment company and then through an initial public offering (IPO), they try to raise a fixed amount of capital. Closed end mutual funds are then usually listed on a recognized stock exchange and can be bought and sold on that exchange. With closed-end funds, shares are not redeemable directly from the fund but investors can rather purchase or sell shares in the market later. In the case of open-end funds, instead of buying shares from an existing shareholder, an investor can purchase shares directly from the fund. The structure of open-end fund is such that shares can be continuously issued and redeemed by the investment company at a price that is proportional to the value of the underlying investment portfolio.
Mutual funds are also differentiated based on the type of securities they invest in. Below is a table showing the different types of mutual funds and the type of securities they invest in.
|MUTUAL FUND TYPE||SECURITIES|
|Equity Fund||Shares or stocks|
|Fixed Income Fund||Fixed Income securities like corporate and government bonds.|
|Money market Fund||Fixed Income securities of shorter term like treasury bills|
|Balanced Fund/Hybrid Fund||A blend of shares and fixed income securities.|
|Index Fund||Equities or fixed income securities put together to mimic a specific index.
Benefits of mutual funds
Mutual funds provide unique advantages for you as an investor. The first advantage of mutual funds is the broad diversification it offers to investors. Diversification in simple terms means “not keeping all your eggs in one basket”. Diversification reduces and can even eliminate specific risk associated with the ownership of few individual shares. Mutual funds employ diversification in a portfolio to reduce risk. For example equity funds will acquire the shares of selected companies from different industries within their portfolio. This diversification virtually eliminates company and industry-specific risk associated with owning individual shares. Mutual funds provide investors with diversification within portfolios and further provides diversification among portfolios. For example, with a GH₵ 1,000 you could invest half in a diversified equity fund and the second half in a diversified fixed income fund. Mutual funds provide benefit of diversification and asset allocation without the large amounts of cash that will be needed if you were to create a well-diversified portfolio by yourself.
One more benefit of mutual fund is professional management. Buying shares in a mutual fund comes with a professional money manager with the technical know-how to invest your funds. As an individual investor, you do not need to perform detailed research and analysis on securities when you can simply buy shares of a mutual fund. Mutual funds also makes it possible for individuals to own broadly diversified portfolios of professionally managed assets with a minimal initial investment and cost. These services offered by professional money managers are covered by the annual management fees paid to the fund companies.
Another benefit mutual funds offer is liquidity. Shareholders are at liberty to trade their holdings with the fund manager at the close of a trading day based on the closing net asset value of the fund’s holdings. This especially applies to open-end funds. For holders of other securities however, the purchase or sale of the security depends on demand and supply as a result there may not be a buyer/seller for that instrument every day, making such investments less liquid.
Finally, mutual funds are also beneficial to the investor because of its simplicity, convenience and reduced cost of owning shares in a mutual fund. An investor can achieve desired level of diversification by simply buying shares in a mutual fund and avoid numerous commission charges.
Investing in mutual funds provides a total solution for your investing needs, whether you have a small amount or huge sums to invest. There are currently mutual funds offerings that cover all of the major asset classes and investing styles in almost all financial markets in the world. As with any investment there are some risks involved in buying mutual funds. For example, market risk of price volatility is something even a broadly diversified portfolio cannot eliminate.
ABOUT OMEGA CAPITAL
Omega Capital Limited is an Investment management, private equity and investment advisory firm. The Company is authorized and regulated by the Securities and Exchange Commission of Ghana.
Nana Kumapremereh Nketiah (JP)
Nana Effah Sarpong
Omega Capital Research
The Alberts, 1st Floor
No. 23 Sunyani Avenue
Phone +233 302 201538
Fax +233 302 734 745
Additional information is available upon request. Information has been obtained from sources believed to be reliable but Omega Capital Limited (“Omega Capital” or “The Firm”) do not warrant its completeness, accuracy or veracity. The firm is licensed and regulated by the Securities and Exchange Commission of Ghana (SEC). This material is for information purposes only and it is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and estimates herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information.