In an article, I have written about benefits of diversification. But small investors
face the problem of spreading out their small investing capital across
different industries. If you are small investor you cannot diversify
effectively owing to variety of factors like having to pay service fees like
brokerage commission, minimum investment to be made in one particular security.
The solution
to above mentioned problems can be solved by investing through mutual funds.
Mutual funds are investment vehicle made up of pool of moneys collected by
large number of investors for the purpose of investing in securities, bonds and
other financial markets instruments.
There are
many benefits of investing through mutual fund. When you invest through mutual
funds, you get to enjoy the benefits of diversification. Your mutual fund asset
manager has enough capital to invest across variety of assets, hence delivering
you the benefit of diversification.
Another
benefit of investing through such vehicle is enjoying economies of scale. Your
fund can bargain discounted prices for investments. Moreover, other favorable
terms can also be agreed because of increased collective bargaining power.
Your fund
manager is a professional manager who has learnt about investing through
experience and university learning. He is therefore better able to manage your
money in a professional style. He can diversify using various statistical
techniques. The third advantage of investing through mutual funds is being able
to use the skills of professional manager.
There are as
many as 40 mutual funds registered with SECP. You can invest in any of the
funds mirroring your preferred style of investing.
Some of the
funds use aggressive style of investing. They try to generate more returns but
the down side is that they are more risky. Some others are income funds, which
target generating regular income along with securing your capital.
There are
sector funds which invest in specific geographical territory or specific
industry e.g. energy mutual funds invest only in stocks and bonds of energy
companies. They don’t invest in other industries. As a fund become more
specific towards particular territory or industry, its ability to diversify
reduces. Try to invest in funds which have consistent track record of
generating returns. Although the returns generated by mutual funds are
dependent on performance of stock markets.
There are
two types of funds 1. Open ended mutual funds 2. Closed ended mutual funds
Open ended
funds are available over the counter and bought and sold on demand. Their net
asset value (NAV) is calculated at the end of every trading day whereas closed
ended funds are those which are only available on the stock market and has
fixed number of shares.
