What is mutual fund and how it works?
A mutual fund at its core is an investment company that pools money of large number of people in order to invests them in different asset classes. Mutual funds charge their clients with fees which can vary greatly depending on the investment style, fund assets and other factors.
Active vs passive portfolio management strategies.
The value of the mutual fund company depends on the performance of the portfolio of the fund. In order to evaluate this performance, we need to use some benchmarks, such as Standard & Poor’s 500 or Russell 100. Active portfolio management has a primary goal to seek out investment opportunities that will help the fund to outperform such indices while passive strategy involves the creation of a portfolio that imitates the performance of the index as closely as possible.
Why to invest in mutual fund?
- Professional Management It’s too challenging for most people to make a strong analysis of hundreds or more stocks, bonds and other instruments in order to create an investment portfolio because it requires a lot of time, knowledge and experience. The most important advantage of mutual fund is that there is no need to choose and analyze financial instruments and create your own portfolio – everything will be done for you by investment experts.
- Economy of scale Due to the fact that mutual funds buy and sell large amount of different securities, there is an advantage of reducing the transaction costs.
- Liquidity Mutual fund’s shares supposed to be very liquid and you can get in or out relatively easy. There is also a possibility to reinvest your income or make additional investments at any time.
- Diversification Mutual funds helps to attain diversification which is one of the most important standard of smart investing. Diversification stands for holding variety of assets in order to spread the market risk.
- Flexibility Because of the simplicity of mutual funds they can be used both by beginning investors and professional money managers.
Investing in shares/equities or other financial instruments are considered as high risk. Above mentioned is not a recommendation to invest in those securities nor is it given any sort of advice or can be considered as complete information. Please seek for an expert advice.