What are Mutual Funds?
This week, we’re taking a look at a mixture of all of the different investments that we’ve talked about so far.
Funds (in the investment world) are collective investments where investors pool all their money in one place with the goal of earning money.
There are many different types of funds, some of which you may have already heard of:
This week, we’re focusing purely on Mutual Funds.
What are mutual funds?
A mutual fund is a portfolio of stocks, bonds and other investments (or ‘eggs’) that we have been talking about. However, rather than managing the portfolio themselves, investors hand responsibility over to the professionals: fund managers.
Fund managers take investors’ pooled money, invest it for them (in the hope of making some profit) and then distribute any profits amongst the investors. The more money you put into a fund, the higher the amount of profit you may get back (if the fund makes a profit!).
History of mutual funds
If you’ve read any of our stuff from the past few weeks, you may be able to guess where the first model of an investment fund was formed…
Yep, Netherlands. Historians generally agree that the first Investment trust was formed in 1774 by a Dutch merchant named Adriaan van Ketwich.
His idea was that he could reach out to those who have a smaller amount of money to invest by offering them somewhere to pool their money, in a diversified way, with other smaller investors to try and make some profit. The name of this first ‘fund’ was Eendragt Maakt Magt, which translates to “unity creates strength”. Aww.
Modern-day mutual funds became very popular in the 80s and 90s as they were gaining a reputation for positive returns. Today, there are tens of thousands of funds in what we call the fund ‘universe’.
Advantages of mutual funds
- They allow investors with smaller amounts of money to invest small amounts in lots of different companies in lots of different countries. This creates diversification and diversification is GOOD!
- They take away the hassle of having to deal with the portfolio yourself. Instead, you can pay someone else a small fee to manage your money for you.
- They are the simplest form of investment funds.
Disadvantages of mutual funds
- If you like to take control of your investment portfolio, these maybe aren’t for you. You won’t get a say in what the investment manager should be investing in or how much return the fund brings in.
- Some funds can be expensive.
- As past performance is no guide to future returns, your money can of course go down as well as up. Picking a winner in advance is nigh on impossible in our opinion.
What lies ahead for mutual funds?
They’ve been around for a while and we think they will stay around for even longer. The majority of our pensions and investment accounts are invested in some sort of fund, as they offer the simplest way of gaining diversification.
Not only that, but they’re getting cheap. We’ve seen some seriously low fund charges emerging over the past few years. That fee is to manage your investment portfolio, so you don’t have to.
Remember: with investing your capital is at risk at all times and you could get back less than what you put in. Past performance is no indicator of future results and the value of your investments could go up as well as down at all times.