A mutual fund is one of the easiest and most convenient investments that you can ever make yet at the same time could be the most versatile and flexible. As far as simplicity is concerned, opening and maintaining a mutual fund account is as easy as opening and maintaining a time deposit or savings account. However, mutual funds may come in different types but they all share the same characteristics.
Mutual funds are being managed by professional fund managers, who, in your behalf and of investors as well, are investing the money in different securities such as bonds, stocks, and even tangible assets such as real estate. Professional fund managers have extensive knowledge and experience in the financial industry which minimizes the risk.
The potential returns that mutual funds offer in comparison to banks are way greater especially if the market is doing good. In fact, unlike banks that give a fixed interest rate, the performance of mutual funds are directly proportional to a certain economy’s performance. In good times, mutual fund companies can give an annual return of more than 30% or 40% and some may even reach to as high as 50% or more. Banks normally give just less than 5%.
However, as much as mutual funds may seem so appealing, it does have its down sides as well. The risk in mutual funds is higher compared to banks. First, mutual funds aren’t insured. Mutual funds are investments, not cash or check deposits thus they aren’t insured. Second, since mutual funds are investments, they may give a negative return. Mutual funds however are less riskier than other investments or money generating vehicles such as stock trading or even real estate or traditional businesses.
There are some ways on how to minimize risk in mutual funds. First, since mutual funds are affected directly by the stock market, the only way to shrug off the volatility of the stock market is to invest long term. History have shown that despite the ups and downs on the market, it will always go up in a linear fashion giving good gains. Another way to minimize risk in mutual funds is to diversify or invest in different mutual fund companies. Some companies outperform others thus in order to increase the chances of getting the better gains, spread your investments to different companies rather than putting it all in one basket. Third disadvantage of mutual funds is the cost. Your gains may be limited because mutual fund companies take the salaries and other expenses from the gains of the investors. For example, instead of earning 50% gain in a year, the mutual fund company may take 10% from it to pay the fund managers and other employees and probably in order to earn profit as well. Honestly, traders can earn as much as 50% in a day and fund managers are most likely traders. If these guys can earn 50% in a day or even just 10% in a day and give you back 50% gain in a year, imagine how huge their gains are.
Because mutual funds are ideal for long term, several financial experts suggest investing in mutual funds for your retirement, the education plan of your children, or even to raise capital for your business in the future. Mutual funds are good investment replacements for traditional plans which gives minimal returns but possess greater risks.
There is nothing to be scared in mutual funds because banks themselves put their money in mutual funds. In fact, some banks own mutual fund firms of their own. Mutual funds are ideal for people who know nothing or have limited knowledge about investing or who don’t have the time to monitor their investments. Earning 2000% in more than 10 years is already a very huge gain and is more than enough to give you a comfortable life (that if you invested a huge amount).
The key in investing successfully in mutual funds is to do some diligent research and pick the best company. Some things to consider in picking the right company are [1] fund performance in time (year to date, 3-year, 5-year, and fund history), [2] management behind the company, [3] reputation of the company, and [4] list of clients. More often than not, investors give more weight on the historical performance of the fund but overall, other factors are equally important as well.