It’s a myth that you need money to make money. Teaming up with other investors offers an easy way to access different asset classes without big upfront investments. That’s the premise behind mutual funds.
Mutual funds are an affordable, low-risk gateway to wealth creation. These investment vehicles pool together money from many individuals and invest them under professional management in multiple securities. Such a basket—called a fund’s portfolio—may include stocks, bonds, money-market instruments, commodities, or commodity-linked instruments, or a combination of these asset classes in line with a fund’s investment strategy.
Each investor buys one or more shares in such funds; these shares represent their part ownership in the fund and any income it generates. Customers purchase such shares at a price called the fund’s net asset value (NAV), which changes every day. It is calculated daily by dividing the total value of securities in the portfolio, less any liabilities, by the total amount of shares outstanding.
The quick guide to different mutual funds
There are several different types of mutual funds available to investors in the UAE. These are usually classified according to the underlying asset class. Popular categories include stock or equity funds, bond or fixed-income funds, money-market funds (which invest in short-term debt securities such as US Treasury bills), commodity or commodity-linked funds, hybrid funds and so on. Investors may also explore investment vehicles to capitalize on real estate, Sharia-compliant Islamic products and more.
Sometimes, funds may be categorized according to how they are administered. Passively managed funds track the performance of an index or benchmark. Actively managed funds rely on a Portfolio Manager or team to decide how underlying assets may be allocated, usually with the aim of performing better than a stated benchmark.
Benefits of investing in mutual funds
Regardless of the underlying asset class, mutual funds offer many advantages for investors, including:
- Simplicity: Mutual funds are easy to understand and access. Not only do they require low minimum investment amounts, they are only priced once a day, eliminating intra-day price fluctuation and uncertainty, as well as bid/ask spreads which add to the associated costs of a transaction.
- Diversification: Like putting all your eggs into one basket, putting money into a single stock or bond exposes investors to underlying issues at those organizations, for example bad management. With the same amount of money, investors can access many different assets via a mutual fund. This diversification brings with it a lower asset risk. Losses at one company can therefore be offset by other outperforming assets in the portfolio.
- Easy access: Most funds can be bought and sold at any time. You simply need to redeem your investment at the day’s NAV, allowing easy access to emergency funds at short notice. As such, mutual funds are considered liquid investments.
- Wide choice: Mutual funds are available in nearly every investment market around the world. In a sense, these funds bring even the most expensive assets within reach.
- Expert management: Juggling the demands of work, life and family means most people don’t have the time to explore and monitor different investments – or the knowledge to learn about them. With actively managed mutual funds, fund managers do the work instead, buying securities according to predefined investment principles, and tracking and readjusting the portfolio as required—all to maximize investor returns. So, if you’ve just received a bonus or collected a little cash that’s sitting in your savings account, you may want to consider actively managed funds instead.
Disadvantages of mutual funds
It is important to note that mutual funds do carry drawbacks. Some funds may carry high expense ratios. An expense ratio that is the measure of how much of a fund’s assets are used for administrative and other operating expenses.