What are mutual funds? Well, an investment or mutual fund is a financial vehicle that captures the money of several different investors to invest in various financial assets, such as bonds or stocks, among others.
This set of investments in various assets is called a portfolio, something that for a single person with limited resources becomes very difficult to replicate. Investment funds are managed by professional managers. They aim to get the most out of the fund in the most efficient and safe way, looking for different investment opportunities.
These types of funds can vary in different specifics, and should take some factors into account:
- Type of assets
- Short/long-term objectives
- Type of profitability
In terms of values, in comparison to stocks, the fund is the opposite. That is, while in stocks the price is quoted and varies according to the “will” of the market, the value of the fund varies according to the performance of the assets that are part of the fund. So when you invest in the fund, you buy part of the value of the portfolio. This is why the price of a fraction of the fund is called NAV, net asset value. This price does not change throughout the day, like a stock, but is updated at the end of the day.
- Diversification – The most valuable reason to invest in this type of financial instrument. Since investment funds typically have dozens of different assets, by investing in a single fund you are investing in a varied portfolio. You risk less because with a single purchase you can invest your capital in assets of various kinds.
- Cost reduction – Investing in several assets individually is costly to do. Market and transaction costs alone can eat up a good chunk of the capital.
- Wide choice and liquidity – As we have already mentioned, there are many types of investment funds, both in terms of assets “making up” the funds, and in terms of management and objectives. Thanks to this variety of choices and the size of these funds, it is very easy to buy and sell these financial instruments because of their great liquidity.
- Access to professional management – A particular advantage of this type of asset is the access to professional management, something that individually would be quite expensive, but in this case, the costs are diluted.
- Associated costs – Despite the costs being lower than buying the assets individually, certain costs such as commissions, fees, taxes, among others, accumulate and make investment funds somewhat less profitable, especially in years of a lower return.
- Variable returns – Bearing in mind that financial markets are not always predictable, in certain years the expected return may be lower than initially predicted.
- Diversification – This can be both an advantage and a disadvantage, considering that by diversifying you reduce risk, you also reduce possible higher returns.
Investment funds are a good investment vehicle for almost any type of investor because they are relatively easy to invest in, there is a wide range to choose from for every risk profile, and above all, they do not require as much time to research as researching assets one by one.
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