Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
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Mutual funds are an easy and excellent way to start investing. They are a popular choice for both beginners and experienced investors due to their simplicity and potential for diversification. Beginners appreciate the ease of entry, while savvy investors value the ability to target specific sectors and strategies.
Mutual funds are investment vehicles that pool money collected from multiple investors to invest in diverse securities, like stocks, bonds, and other instruments. A mutual fund is usually actively managed by professional portfolio managers. mutual funds were created to actually try to beat the market. They are managed by experienced portfolio managers who choose instruments that they feel will outperform benchmarks. Though most mutual funds are actively managed, a type of mutual fund known as index mutual funds were created to track- as opposed to ‘beat’- a specific index, like the S&P 500. Index mutual funds typically charge lower fees than actively managed mutual funds and may also be considered a low-risk way to invest.
A typical mutual fund holds dozens, or even hundreds, of instruments as this structure allows investors to spread their risk in a consistent and managed way. A mutual fund roughly works like an investment company, in which individual investors hold shares. The mutual fund is governed by a set of rules- called an investment mandate- that dictates which investments the fund manager can make. This mandate can be based on geography, asset classes or instruments, sectors, currencies, or any combination of strategies. Once defined, the mutual fund manager invests the fund's money in assets that adhere to the guidelines of the mandate.
There are several types of mutual funds, including:
Mutual funds can be either distributing or accumulating funds. A distributing fund will distribute dividends received from the investee companies back to the fund’ shareholders usually on a quarterly basis. While accumulating funds will reinvest the dividends back into the fund, leading to a higher value per share versus a comparable distributing fund. The tax treatment of these funds may differ so it is important to understand the tax system of your country of residence.
A helpful way to determine what kind of mutual fund you want to choose is by looking at a mutual fund’s KID (Key Information Document). The KID holds basic information about the instrument, such as its investment objective, fund, cost and charges, historical performances, whether it is accumulating or distributing and other key characteristics.
Investing in mutual funds involves various fees and charges. Fees matter because they eat away at a fund’s performance and the higher the fees, the greater the impact on the fund’s performance over time. Therefore, it is important to review and understand a fund’s fee structure before making an investment.