Investing through mutual funds and its benefits

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.