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What is a mutual fund?

Mutual funds are a universal way to increase money and can be present in the investment portfolio of all categories of investors: from the most conservative to the most aggressive. How can you find the best fund for yourself and make no mistake with the choice of the management company?

Why Mutual Fund?

A mutual fund is a certain organization, or rather, a property complex that, under the leadership of a management company, earns a profit for its members. At its core, this is an organization that has pooled funds from a certain number of investors for more profit than they could have earned alone.

Mutual funds, unlike deposits, most often have a higher yield, and in the case of open-ended funds, you can get back money at market prices at any time. Open and interval funds have the highest degree of transparency and allow you to monitor the status of your investments daily.

Through mutual funds, an investor gets the opportunity to invest in national and foreign stocks and bonds not directly, but through a professional intermediary on the stock market – an asset management company. Due to the fact that a mutual fund combines the funds of many shareholders, a sufficiently diversified portfolio of securities is formed by the management company, and each shareholder becomes the owner of a share of such a portfolio in proportion to the number of units purchased.

The income of the investor who invested in the mutual funds will not consist of dividends or interest on the invested funds, but from the increase in the value of the share. If the value of the fund’s assets has increased, then the shareholder will receive a profit when he sells his shares back to the management company. The fund does not guarantee the shareholder specific profitability of investments – it all depends on the professionalism of the management company and the investment fund chosen.

Before investing

Before investing, it’s worth deciding on two things: how much do you plan to invest in a mutual fund and for how long. It is from these factors that the type of fund will be veiled.

In total, there are three types of mutual funds:

  • Open fund. These are funds that anyone can join with a minimum fee. The amount of the contribution to them is minimal and can be several hundred rubles. An important feature is that you can buy or sell a share in a convenient weekday. On Wednesday you wanted to become a participant – no one will forbid you. You wished on Friday to sell your share, and nobody restricts you either.
  • Interval fund. This kind of funds is a bit more complicated. Payment of shares or acceptance of new shareholders is carried out only a few times a year. This happens 2-4 times, but not less than one. The sale and purchase period lasts for half a month in which anyone can withdraw from the fund or purchase a new share.
  • Closed funds include the most complex structure, they are not available to everyone. Here the restrictions relate, at most, to the amount of the share. It can amount to hundreds of thousands, and millions. Funds invest in large projects, construction of residential complexes. Since the investment objects themselves are quite solid and are not cheap, then the requirements for investors are high.

All funds set the minimum entry threshold, an average of $ 1,000. If the amount is small and the investment period is a maximum of a year, then it is worth choosing from open funds.

If the investor has the opportunity to invest money for a longer period – you can look at the interval funds. If the investment horizon is 510 years, the investor may pay attention to closed funds.

It is much more difficult to determine for yourself the degree of risk acceptance for the sake of the opportunity to get greater profitability. Profitability and risk are closely related: the higher the degree of risk, the higher the chance of getting a high return. The least risk is in bond funds and money market funds. The highest yield and, accordingly, the risk – at the equity funds.

The most weighted average option in terms of the return-risk ratio is mixed funds. These funds adhere to a balanced investment strategy and invest money of investors both in high-yield financial instruments, such as stocks, and in fixed income instruments – bonds, deposits, etc.

So each investor individually selects the optimal fund for him depending on the amount he has, the period of investment and the desire / opportunity to risk. At the same time, open funds are suitable for all categories of investors. This is a kind of financial reserve, when money can be cashed at any time without significant losses.

In order to reduce the risks of your personal investment portfolio, it is worth allocating money between 2 – 5 funds with different investment strategies, while being managed by different asset management companies (AMC).

Safety equipment of AMC

Having decided on the types of funds that are of interest, you can proceed to the assessment of the management company – the main actor. The main criterion is not profitability, but the reliability of AMC, and the most important measure of reliability – the founders of the company.

It is worth paying attention to whether the AMC is in the investment group, what relation do its founders have to the stock market. As a rule, the founders of an AMC are large investment companies and banks. It is worth paying attention. What experience and ratings have the founders of the AMC in the stock market.

The next, but no less important criteria are the term of operation of the management company and the historical profitability of the fund.

Ratings are a good thing, but one should not forget that historical returns are the result of past events and in no way guarantee that the fund will bring similar returns in the future. First of all, the investor should rely on the trust of the best team of analysts and managers.

Not the last place in the analysis of the company takes the amount of money under management. The larger this indicator, the more financially stable the management company is, and the better analysts it can attract, which naturally affects the potential income of investors. However, this indicator should be considered in the context of public funds, since it is important with how many individuals the AMC works and how much it is interested in spending time on small investors.

Indicators of the seriousness and professionalism of the management company also serves its tariff policy. Large management companies waive the commission for entering and exiting the fund, take the minimum remuneration (about 2% per year with a maximum of 5%), provide free storage services and still show good results. While working with an AMC, a number of commissions are charged, the investor has to calculate the final “net yield”.

Time, time…

Investing in mutual funds is best for the long term – for a year or two. During this time, the market will have time to go through the growth stage, and the fall, and “standing”, but almost certainly the value of the papers at the end of the term will be more than at the beginning. With shorter periods (less than a year), you put your money at greater risk, and in this case it is more difficult to count on an unconditional increase in the value of your investments. Simply put, it may just be unlucky, and you invest money when the securities are at the peak of their value.

Long-term investments are much safer. A long-term trend in the stock market is always on the rise. Practice shows that over a sufficiently long period of time, even the most unfortunate investors can earn well. In addition, many investors make the mistake of selling cheaper securities, often at the bottom of the price.

It is important to understand that the stock market likes regular investment and consistent investors. Buying securities in different periods, the investor smoothes market fluctuations and gets the opportunity to buy shares at a weighted average price for a certain period of time. As a result, it is possible not only to reduce the risks associated with the likelihood of entering the maximum of the stock market, but also to get a good profit by purchasing the desired securities at a lower price.

You should always keep in mind that a mutual fund is a long-term instrument, so in order to get a good return on invested capital, you need to be patient and just wait.

Assessment of the current market situation

In one article, we will not be able to assess all possible markets in all countries, but we will show our readers an algorithm that they can use when choosing an investment fund or making a decision to invest in such a fund.

First of all, you should deal with the profitability of such funds in the country or market that interests you. Naturally, if you have large capital, you are not limited in choice, and you can afford to invest in various mutual funds operating in different markets, thereby further diversifying your portfolio and reducing possible risks. But if funds for investment are limited, it is necessary to choose more carefully.

For example, we consider the situation in Ukraine. As we can see on the below-listed yield of domestic funds, the annual yield of the most profitable fund over the past year was almost 16%. This is an excellent indicator, but you need to make a discount on inflation, since the units are bought and sold in hryvnia. Therefore, the declared inflation for the last year was about 9 – 10%. Also, during investing in a mutual fund you will pay a commission for the transfer of funds, for managing the capital, deductions of interest from the income received are possible.

Рейтинг доходности паевых инвестиционных фондов


Therefore, the real yield of this fund was 5 – 5.5%.

For comparison, now Ukrainian banks offer placement of deposits at 15 – 16% per annum. Plus, the contribution of up to 200 thousand UAH fully insured in the fund for guaranteeing deposits of individuals, which reduces the possible investment risks to a minimum.

So, we conclude that the profitability of the most profitable Ukrainian mutual fund in the previous year did not exceed the yield on deposits. However, since the PIF, unlike banks, your potential profitability is not declared, the profit in the next year may be higher (or lower depending on the fund’s activities and the market situation).

This situation is not associated with low profitability of funds, but with relatively high rates of inflation, which translates into expensive deposits. For the countries of central Europe, where the return on deposits rarely exceeds 3% per annum, the yield of 15% will be fantastic.

Summing up this article, we can say that investing in a mutual fund can bring a good profit to the investor, taking into account high-quality and qualified capital management by the fund representatives. However, as we have seen in our example, if you wish to invest in mutual funds or any other available tools, we recommend comparing the real returns on these assets with bank deposits, which, more often than not, are more reliable and stable deposits. And if “the game is worth the candle” safely invest.

Also, we want to remind you that it is best to distribute your investments and form a balanced investment portfolio. Then there will be a place in it as well as assets with low risk and average profitability, as well as for highly risky but more profitable instruments.

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