Hello Friends,
Ramadan Mubarak!!! How was your weekend? In my last post I said I was going to talk about mutual funds in my next post, but I haven't been able to post in a while, partly because of Ramadan, and partly because of work.
However, I'm back to posting, and today's post will be centred around Mutual Funds. If you remember in my last post, I said that you don't need to have millions in order to invest, which is where mutual funds come in. Now let's talk Mutual Funds,
What is a Mutual Fund?
- A mutual fund can be seen as a company that brings together a group of people and invests their money in stocks, bonds, and other investments. Each investors own shares which represent a portion of the holdings of the funds.
You can make money from a mutual funds in the following ways:
- Dividends if the funds invested in stock on your behalf, and Interests, if investment is in bonds.
- Capital gains: This occurs if the fund sells securities that have increased in price. These gains will be passed on to invetors in a distribution.
- If the fund holdings increase in price, and are not sold by the fund manager, you as the holder can decide to sell your mutual funds at a profit.
Who Operates a Mutual Fund?
- Mutual funds are operated by professional investment firms made up of people who have expert knowledge of the money and capital market. In Nigeria, most funds are operated by investment arms of banks, stock-broking firms, etc
Please not that a mutual fund is different from a stock broking firm. A stock broking firm buys and sells shares on your behalf based on your instructions. With a stock broking firm, you keep tabs on the performance of your stocks and monitor daily. You solely make decisions whether to buy new shares, sell off existing shares and so on. However, with a mutual fund, the fund manager makes all decisions regarding all investments. You, as the fund holder have no say whatsoever regarding the investments.
Advantages of Mutual Funds
- Your money is managed by a professional fund manager, so you don't have to invest so much time and money in monitoring and managing your investments. Please note that you do not have a say in what your fund managers invest in. He chooses what and where he invest in, but you share in the profits and losses of the funds.
- A mutual fund is liquid: It allows you to request that your shares b converted into cash at any time.
- Buying a mutual fund is simple and easy to do. Almost every bank has its own line of mutual funds, and the minimum is small, so you can do this any time you have some cash.
- Economies of scale: Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what you would normally pay for securities transaction.
- Owning shares in a mutual fund helps spread your risk out, as compared to owning individual stocks or bonds. This is because mutual funds own hundreds of different stocks in many different industries, so a loss in any particular investment is minimized by gains in other. (Brilliant isn't it?)
Disadvantages of Mutual Funds
- No insurance against losses- Losses don't happen often with mutual funds, but when do, you stand the chance of losing all your investments.
- Fees: Most mutual funds charge management and operating fees that pay for the fund's management expenses. Some also charge high commission on sales.
- Loss of control: The fund manager makes all decisions concerning investments with your funds. They decide where to invest, what to invest in, and when to invest in.You, the fund holder practically have no say in this.
- Mutual funds maintain large cash reserves to protect against simultaneous withdrawals. This means that some of the funds' money is invested in cash instead of assets, which ten to lower potential returns.
I'll stop here for now, so I don't overwhelm us all with too much stories. I'll continue with more on mutual funds in my next post. I hope you have benefitted from today's post.
Love, till my next post.
'Lade
Source: Mutual Funds definition- Investopedia
Comments
Post a Comment