MUTUAL FUNDS: What Are They? A Cheap Way To Grow Wealth | By Ofomaja Joshua
I have been getting a lot of questions on the concept of a mutual fund. This post is intended to help clarify things for those interested.
Characteristics of Mutual Funds
So what exactly is a mutual fund and what are its characteristics?
A mutual fund is any investment fund (company) where professional fund/money managers manage the fund of the company and then sell a stake or part ownership of that fund to the public.
Basically, the fund manager creates a portfolio considering the end goal of the fund and then sells ownership to investors who don’t want to go through the stress of creating their own portfolios. Also, the ability to invest with smaller money compared with what they would normally have spent if they try creating such a portfolio on their own.
Usually, they are part of most people’s pension portfolio. Though they are used in a whole lot of ways like savings for something and can be used as a better holding than cash. Personally, I use them for risk management.
The mutual fund company can charge fees but they are usually low. Also, most mutual funds are open-ended that means you can sell your stake at any time and take out your money from the fund.
These are simply any financial instrument that has the potential to produce a return on the capital of the holder of such an instrument. Examples include gold, stocks/shares, bonds, t-bills, etc.
An asset in the bottom line should be what can bring in money but sometimes there are times when it does not and investors know how to handle such moments.
A Portfolio, on the other hand, is basically a combination of different assets together. It’s more like a basket of assets.
This is what a mutual fund tries to do for their investors, they create portfolios to help achieve a specific investment goal.
So we can say an example of a portfolio can be represented like this (Shares of GT Bank Plc + Access Bank Plc + Dangote Cement Plc)
Type of Mutual Funds
Now that you have the basic understanding of what a portfolio is you can just call a mutual fund a portfolio where you can buy part ownership.
Below are the four common type of mutual funds;
– Stock Mutual Fund:
This a mutual fund that is based on a portfolio of stocks where investors can just buy part of and have a good edge of making money.
Stock mutual funds can have many forms like Funds for growth companies, ethical funds (investment in stocks that are environmentally friendly), sector base funds eg Banking sector funds, industrial sector funds, and the likes.
– Bonds Mutual Funds:
This is basically a mutual fund with a portfolio of bonds it can be either corporate and government bond separately or both combine in the same fund.
This type of fund is considered safe compared to the stock mutual fund. Buying individual bonds on your own may not be cheap for you to carry out as a small investor.
– Money Market Funds:
Money market funds are one of my favorites. They are basically mutual funds with a portfolio of short term debt instruments like t-bills, Bank CDs (certificate of deposits AKA fixed deposits), commercial papers, etc.
It is really good for short term savers. I love them because they help me cover short term risk.
– Hybrid Funds:
Please, just ignore the fancy name. It’s basically a fund with a portfolio that combines both stock and bonds together.
This is to give an investor some form of diversification according to the asset class.
If you feel this can help you achieve your goals while looking at your risk tolerance you can buy them. I hope this has helped you understand to concept of a mutual fund and the idea behind them.
Any opinion you get from me are solely for educational purpose, they do not take your personal circumstance into consideration. Thank you.
ABOUT THE WRITER
My name is Joshua Eriaborosan OFOMAJA (JEO), I solve Money and Marketing/Business problems for individuals and businesses.