For most of the first timers and people looking to make professional decisions regarding their portfolios, mutual funds present the best case.
The best thing about mutual funds is that they allow you to choose from a diverse pool of investments. Dealing with mutual funds is also beneficial because they will enhance your expertise and allow you better handle the inflation factor. Although there are numerous types of mutual funds available nowadays. But for simplicity, we can divide them into 3 different categories.
They are a type of investment and, unlike traditional savings, the amounts invested in Mutual Funds do not have a guaranteed gain, since they involve the risk that the investments made will not deliver the expected return.
It is an investment alternative that consists of bringing together the assets of different people, natural or legal, to invest in financial instruments, a task carried out by the Management Company.
The instruments in which they can invest vary according to the fund and are defined by their Investment Policy, which is found in their Internal Regulations, approved by the Superintendency of Securities and Insurance. In this way, you determine the different types of existing funds, which allow you to select the one that best fits your personal situation.
Mutual funds are in themselves a diversified alternative, as they invest in numerous instruments. They do not have expirations or require renovations, so they are very comfortable. In addition, they allow to dispose of their money with ample facility (liquidity).
It is called the Mutual Fund to the sum of contributions in money delivered by natural and legal persons to a corporation or administrator, to invest in different types of financial instruments that are public offering values or even goods, with the aim of achieving a Profit, which is then distributed among all those who made a contribution.
Unlike savings, the amounts invested in Mutual Funds do not have a guaranteed gain, since the mutual funds run the risk that the investments made will not deliver the expected return. For this reason, the profit may be less than expected or you may even lose part or all of the money invested.
Due to this, the law that regulates this type of investments is clear in indicating that this investment is “at risk” of those who make the money contributions to the fund. For this reason, in advertising of mutual funds, the phrase “The returns obtained in the past by the mutual funds managed by this company do not guarantee that they will be repeated in the future”, in order to account Of this situation.
Therefore, it is very important to understand what the fund invests the management company and what is its management capacity, since this will depend on the choice made of the different investment instruments and, therefore, the results that are Obtain.
Types of mutual funds
First of all we have the equity funds.
Equity Funds mainly deal with stocks in the industrial sector. The target industries can belong to a particular genre or they can be diversified as well. The most important aspect of equity funds is that they target growth and benefits in the long term. Investors should realize that equity funds have a greater risk factor as compared to the other kinds of mutual funds.
This is because the bulk of the equity funds deals with the stock market, which can be quite unpredictable at times. However, it is also true that the investors can make the most money from equity funds.
Then we have the fixed income funds.
Such kind of funds usually involves lower risk investments like bonds and gifts. The investors can expect a stable income generated from these investments, but there is not much growth in the long run. In order to understand what fixed income funds are about we need to understand the definitions of bonds and gifts. In the case of bonds, an investor pays some money to an organization and becomes the creditor.
Whereas, in the case of gifts, the lenders lend money to the Government, which implies a safer form of investment. Safety and stability are the two most salient features of fixed income funds. Another interesting kind of investment is the dynamic bond funds. These kind of bonds places huge emphasis on fixed income schemes.
And finally we have the money market funds.
If you are looking for a short term investment with instant returns, then the money market funds are the way to go. However, it should be noted that the returns would not be as high as one can expect in the two types of funds discussed above. The best thing about these funds is that the risk factor is very low and the investor doesn’t have to worry about losing their principal investments.
This makes it the ideal form of investment for those who like to be extra cautious in the market. There are also balanced funds available. These give us the best of both worlds. On one hand, you have the advantage of a current, stable source of income while on the other hand there is potential for long term growth. Such investments deal around 40% of the capital in fixed-income while the rest of the 60% goes for the equities.
Unit Linked Insurance Plans
Before we conclude this article, we will briefly explain what is the Unit Linked Insurance Plans? These plans are somewhat similar to the mutual funds that we have just discussed. These are usually offered by the insurance companies and they cover both; the insurance aspects as well as the investments. These too offer the investors with a greater degree of freedom and flexibility and allows them to choose from a whole host of options. However, on the downside, ULIPs do not have much allowance for early liquidity and the investors have to stick with them for a fixed period of time.
The advantages of investing in mutual funds are:
to. They are managed by investment experts.
B. You may ask: Do I have enough time or skills to manage my own portfolio or investment portfolio? For an investor with little time or lack of experience in the world of investments, mutual funds are an efficient alternative to have an expert who runs, manages and controls their investments.
C. They allow you to diversify your savings between different types of investment instruments (stocks, bonds, etc.), ie “do not put all the eggs in one basket”. The idea behind the concept of diversification is that when investing in a large number of instruments, whether of a different type (stocks, bonds, term deposits, etc.) or of the same type but of different issuers (shares of different companies ) The loss in one particular of those will be minimized by the gain in the others.
In other words: the greater the number of different instruments and different actions you have, the lesser the negative impact that individual investment can cause you. Mutual funds generally have many instruments of different types and different issuers. It would be almost impossible for a non-sophisticated individual investor to build a portfolio or portfolio of this type with a small amount of money.