A mutual fund is a trust that pools the savings of several investors and then invests these into different kinds of securities (shares, debentures, money market instruments, or a combination of these) in keeping with a pre-stated investment objective. The income thus generated and the capital appreciation is distributed among mutual fund unit holders in proportion to the number of units held by them.
The Net Asset Value [NAV] is the total market value of all the assets, including cash, held by the fund, after deducting its liabilities. The unit price represents the market value of one unit of the mutual fund. It is the price at which investors can buy or redeem the mutual fund’s units.
Mutual Funds offer important benefits such as:
- Diversification – involves holding a wide variety of investments in a portfolio to mitigate risks. Mutual funds usually spread investments across various industries and asset classes, constrained only by the stated investment objective. You benefit from diversification and asset allocation, without investing the large amount of money needed to create an individual portfolio.
- Professional Management – mutual funds employ experienced and skilled professionals, who conduct investment research, and analyse the performance and prospects of various instruments before selecting a particular investment. You benefit from the services of professional fund managers, which would otherwise be costly for an individual investor.
- Liquidity – usually unit holders can redeem their units from the fund anytime, although exit charges may apply in earlier years.
- Flexibility – mutual funds offer a variety of plans, such as regular investment, regular withdrawal and dividend reinvestment plans. Depending on your preferences, you can invest or withdraw funds, accordingly.
- Cost Effective – because of the number of investors, the fund’s transaction costs, commissions and other fees get reduced considerably and because of the benefits of larger scale, mutual funds are comparatively less expensive than direct investment in the capital markets.
- Well Regulated – Funds are regulated and monitored by the Central Bank of Ireland which strives to protect the interests of investors. Mutual funds are required to provide investors with regular information about their investments.
Mutual funds have different risks depending on the portfolio composition. In general, mutual funds are subject to the following risks:
- Systemic or market risks are risks that affect the entire market and have an impact on the entire class of assets. The value of an investment may decline over a period of time because of economic changes or other events that affect the overall market. Systemic risks include risks related to interest rates, inflation, exchange rates and political events, etc.
- Non-systemic risks refer to risks associated with investments in a particular sector or industry or stock. Sector-specific schemes invest in equities of a particular industry or sector
- Other factors that have a greater impact on the performance of a mutual fund include the skill and experience of the fund manager and the research team, the size of the fund and issues such as redemption pressures.