Hi my name is Dani from Wealthmakr and today I would like to explain what a mutual fund is.
Today we explain what an mutual fund is, its advantages compared to direct investment, but also its disadvantages and how you can benefit from mutual funds.
What exactly is a mutual fund?
An investment fund is an investment product for private and institutional investors, and is also referred to as an investment fund. I’ll explain exactly what it is later.
First we will come to how an investment fund works.
A group of investors usually invests monthly or once a month in a pot, the fund.
This fund is an independent investment company. This company hires a fund manager who is responsible for managing the money.
His task is to invest the money wisely. For this purpose he has a team at his disposal, which supports him in his research work for good investments. He can invest in different asset classes.
Which one he will ultimately choose depends firstly on the fund type and on the Guidelines by which he must comply.
What are the fees?
The fund manager and the fund company are paid by fees paid by the invested capital are levied.
You can find out what these fees are in the Total Expense Ratio (TER) or in the total costs in the fund’s sales prospectus.
Each fund company is obliged by law to make an up-to-date sales prospectus for each fund available to the public.
In addition to the total expense ratio, there are usually one-off issue surcharges which are collected by the bank or the corresponding financial intermediary.
These are usually between 1-5%, but there are ways to avoid them if you do not need banking advice.
Is my investment protected?
At the beginning I said that investment funds are also called special funds.
This means that the assets of the fund are kept separately from the fund company and are therefore still available to investors even if the fund company should go bankrupt.
You can imagine this as if you were buying a property and appointing a property manager.
If the property manager goes bankrupt, you still own the property, so all you have to do is find a new manager.
What are the advantages compared to other asset classes?
A direct investment is an investment directly in a share, property or a bond without going through a fund.
The difference is most obvious when we show the example of a property.
To buy a property you usually need a lot of money.
With an investment fund, 50 dollars a month is enough to invest as a savings plan.
The entry barrier is therefore clearly low.
Through the community of investors more capital is available and thus larger and profitable investments can be made.
For example, an investment fund can buy office complexes, which is not affordable for most private investors. In addition, the risk is usually much lower.
An equity fund, for example, invests in 20 to 100 companies simultaneously.
The detailed advantages of Mutual Funds
This ensures greater diversification and risk management.
Another advantage for a fund is that it is controlled by government agencies.
Fund managers set their own rules, which they must also implement rigorously, as they are controlled by the government.
These can be rules such as a maximum 20 percent shareholding or a minimum level of cash reserves.
You can read about the rules of the game in the sales prospectus.
In conclusion, it can be said that the fund manager usually has years of experience and works with teams of experts who are particularly well versed in the valuation of, for example, real estate.
Summary
Of course, if you have a lot of time, money and experience, you can earn more with direct investments, because you don’t have to share the profits and don’t have to pay management costs.
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We want to help you to have your finances under control so that you can make independent decisions without the help of consultants. Learn also about ETFs here.
We hope this overview has helped you to get a better understanding of shares. If you want to know more about Mutual Funds, you can find useful information about the Essentials of Mutual Funds
If you want to know more about stocks, have a look at our Article The different types of shares