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Profit, loss not mutually exclusive to funds

By Zhang Yu (China Daily)
Updated: 2007-03-02 10:41

Mutual funds, their advantages and disadvantages:

To understand what mutual funds actually are we need to know about stocks and bonds first. Stocks are shares of ownership in a company listed on a bourse. They are the most common ownership investment traded on stock exchanges.

When you buy bonds, you basically lend your money to the government or a company. In return, you get interest, paid back with your principal amount after a fixed period of time. Bonds are the most common lending investment traded on the market. Many other types of investments exist in the market - annuities, real estate, precious metals and mutual funds.

A mutual fund is a monetary intermediary that allows a group of investors to pool in their money with a predetermined investment objective. Each mutual fund has to have a fund manager, who takes the onus of investing the collected money into securities, usually stocks or bonds. Investing in a mutual fund means buying its shares. Mutual funds are one of the best investments because of their cost efficiency and easy-to-invest method - for instance, you don't have to decide which stocks or bonds to buy because the mutual fund managers do that for you. But by far the biggest advantage of a mutual fund is its diversification.

Diversification means spreading your money across different types of investments. Which in turn means when one investment is down another could be up, thus reducing the risk of lost tremendously.

Mutual funds usually buy multiple (may be hundreds or even thousands of) stocks because they are set up to do exactly that. They can buy bonds, both domestic and international, too. It could take an individual weeks, or even months, to do this, but mutual funds do it in a few hours.

Mutual funds, however, are usually not guaranteed or insured by governments or government agencies. That means even if you buy through a bank and the fund carries the bank's name, you can lose money. Unlike a successful company, a mutual fund's excellent past performance is no guarantee of a profit in future. And all mutual funds have costs that lower your investment returns.

Also, you have to bear your share of the costs even in case of negative returns. And to top it, you can never exercise any control over the make-up of a fund's portfolio, or what shares or bonds are bought or sold.

 

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