A portfolio of investments is a smart choice when planning for the future. Not putting all one’s eggs into one basket diversifies an individual’s holdings so they do not risk losing all their wealth in one downturn.

When setting long-term financial goals, mutual funds can be a good choice and, over the past few years, have become increasingly popular with investors, both new and experienced.

How mutual fund investing works

A mutual fund is a managed investment fund. Investors’ money is pooled and invested collectively.

Shares in the mutual fund can be bought rather than having to invest in a range of securities individually. The managers of the fund will take these steps and make the decisions, saving investors’ money and time.

The managers apply their experience and expertise to help generate better returns on one’s money.

In exchange for this, a small fee is paid when buying shares in the mutual fund.

The term mutual fund applies to structures that are regulated and sold to the general public.

How to buy shares in a mutual fund

Shares in a mutual fund can be bought from a variety of regulated financial institutions, including a stockbroker, bank, licensed financial adviser and even directly from the mutual fund company itself.

Check the specific details of the fund before putting in any money. Do research in advance and once a decision is made on which mutual fund to invest in, buying shares in it is straightforward.

What are some of the ideas behind mutual funds?

Although the idea of pooling investments is the same for all mutual funds, each one is very different.

Some funds invest in stocks only, some in bonds only and some in a mix of different securities.

A great advantage of mutual fund investing is that the managers have knowledge and expertise that can be applied to generate a better rate of return.

As part of utilising the expertise to the best of their ability, mutual funds are often set up with a certain theme or sector of focus. This helps capture market opportunities within a smaller subset of investments.

Sectors and themes

• Sector funds are based on specific sectors within a broader asset class.

For example, high-yield funds are bond funds that invest in junk bonds only. Technology equity funds invest in the equities of technology companies only.

• Theme-based funds include “growth” and “value” equity funds.

Value funds focus on investing in equities that look underpriced and are expected to provide good value for money. Growth funds invest in equities that are expected to see a fast rate of growth.

• Other more recent examples of themes include environmental funds that invest in companies that have environment-friendly working practices.

Whichever mutual fund investment is selected after thorough research, the investor must make sure they fully understand the risks and costs involved and check if the fund will help them meet their financial goals.

This article first appeared in The New Savvy

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