Mutual funds as an investment vehicle

What are mutual funds?

A mutual fund is made up of a pool of money from many investors which an investment management firm invests into stocks, bonds or other financial assets. The collective financial strength of these investors makes it possible to make investments across sectors, industries and markets. When you invest in a mutual fund you own a proportion of every investment in it.

Sometimes referred to as a unit trust, a mutual fund provides many benefits to investors, including greater diversification and professional investment expertise.

What can a mutual fund do for you?

Regardless of your investment goals, mutual funds can potentially play an important role in every portfolio. You don’t have to have a lot of money to invest in a mutual fund as many funds have low minimum investment requirements.

Benefits include:

1. Expertise. Fund managers do the research for you, select the securities and monitor their performance.

2. Diversification. Mutual funds can invest in a range of companies and industries globally. This allows more control on the risk and return ratio.

3. Liquidity. Just like an individual stock, most mutual funds allow you to convert your investments into cash at any time.

4. Simplicity. Many fund distributors are available to retail customers, including retail banks and fund platforms.

Disadvantages include:

1. Costs. Professional managers, distribution and administration all cost money. Therefore, mutual funds typically charge a fee to cover those costs.

2. Overexpansion. A fund can become too popular and grow too big, making it difficult to handle efficiently. To find placement for the excess money the manager might have to invest in less-than-optimal instruments.