Overview
Mutual funds are financial investments made up of a pool of money collected from many individuals to invest in securities like stocks, bonds, money market instruments like government treasury bills and others. Mutual funds are managed by professional fund managers who have experience in the financial market and allocate the funds to produce income for the individual investors. The value of the mutual fund company depends on the performance of the securities the funds are used to buy. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. As an investor in mutual funds, the returns or benefits of your investment comes from these sources.
- Capital gains, which mostly comes from upward price movement of the fund.
- Dividends on stocks or interest on bonds and bills which the funds are used to buy.
- Increase in the asset base of the fund without it being sold, the value of each unit of the fund also goes up.
Types of mutual funds
- Money market mutual funds
Money market mutual funds are those funds invested in safe, short-term debt instruments, mostly government Treasury bills and other short-term investments. This is a safe place to park your money. The returns on these investments are mostly benchmarked on the Treasury bill rate plus 1% or 1.5% or more depending on the securities acquired. You won’t get substantial returns, but you won’t have to worry about losing your principal. The returns on these investments are far more than what you will earn on a saving account.
These funds often need you to put your money in for at lest 3 months and you are good to go. You can have access to your money anytime you want. Without withdrawing your funds they tend to be reinvested with the interest earned (automatic rollover).
2. Equity mutual funds
Equity mutual funds are collective contributions that are invested or used to buy shares (stocks) in companies. This sort of fund invests principally in stocks (shares) mostly of listed companies and a few portions allocated to unlisted companies. These funds are mostly expected to be for a duration not less than 3 years. Thus, the ideal timeframe for this fund should go beyond 3 years. These does not mean you cannot withdraw your funds before then but because of the risk in investing in equities, it is highly likely that your funds may not be in profit in the short term. Thus, these funds are risky and long term, but they tend to provide substantial returns in the long term thereby making their investment worthwhile.
3. Balanced mutual funds
These funds are mostly a combination of equity and fixed income securities. The money is spread in a ratio: say 70:30, thus 70% of your money will be used for fixed income investment and 30% for equity investments or vice versa. The combination of asset classes in the fund vary across fund managers. The objective is to reduce the risk of exposure across asset classes but provide substantial returns to the investor.
4. Fixed-income mutual funds
Fixed-income mutual fund focuses on investments that pay a fixed rate of return, mostly different kinds of bonds such as government bonds, corporate bonds, or other debt instruments. The most common type of fixed income securities are bonds and treasury bills. These funds have a medium term investment duration of say 2+years. By investing in Fixed income securities you are guaranteed continuous stream of cash flows in the form of coupon/interest payments at an attractive interest rate.
5. Others.
We have other funds which invests in only some category of instruments and assets.
a. Real estate fund: this fund as the name suggests is used to invest directly in the real estate industry. Mobilized funds are invested into securities of real estate companies, development of real estate or invest equity in companies that engage in real estate investment activities
In Ghana we have only one real estate mutual fund, Republic Investmnents REIT (Real Estate Investment Trust)
b. Ethical Fund: this fund is also target specific to meet the needs of socially responsible investors. Moneys pooled from investors are used to invest in ethical business. This fund allows you to align your investment choices with your life values
”Investment decisions are affected by the investor’s personal beliefs embedded in social, religious, environmental or health principles. These individuals are aware of the effects of socially irresponsible companies and therefore don’t invest in companies that damage the environment, manufacture or sell arms, exploit people/animals or promote gambling. They are prepared to balance making a return on their money with concern and respect for wider social and environmental issues”. Databank has one of such funds known as Ark fund.
Advantages
Mutual funds are considered a good starting point for young investors since they have a variety of advantages. Some of which include:
First, a more diversified portfolio can be created. Investors with a relatively small sum to invest, would find it difficult to obtain a broad spread of investments without incurring high transaction costs. If, however, 10,000 people each put money into a fund there would be so much available to invest in a wide range of securities. A large fund like this can buy in large quantities at a time, reducing dealing and administrative costs. Thus, risk is reduced by diversification and costs are reduced by economies of scale in share dealing and administration (e.g., time spent managing the portfolio).
Second, even very small investors can take part in the stock market. If you have only Ghs 10 a month to invest, it is possible to gain exposure to the equity market by investing through mutual funds.
Third, you can take advantage of professional management. You can avoid the demanding tasks of analyzing and selecting shares, going into the market place to buy, collecting dividends, etc., by handing the whole process over to professional fund managers.
Finally, you can enter exotic markets that would otherwise be beyond your reach. Perhaps you wish to invest in South Africa, US or some other category of far-flung financial securities, but consider the risk and the complexities of buying shares direct too great. Collective funds run by managers familiar with the relevant country or sector can be a good alternative to doing it alone.
Disadvantages
- Underperformance compared with a benchmarked index
- You will also lose any rights that accompany direct share investment, including the right to attend the company’s AGM.
- And you lose the fun of selecting your own shares with its emotional highs and lows, triumphs and lessons in humility.
- High costs of fund management
Sales’ or ‘front-end’ load. Some mutual funds charge a fee called a sales load. Sales loads serve a similar purpose to commissions by compensating the financial professional for selling the mutual fund to you. Sales loads can be front-end, in that they are assessed at the time you make a deposit into your investment account. One investment bank I know charges 1% for every deposit made into the fund. Back-end are charged if you sell the mutual fund.
Annual charges. The annual management fee is typically 0.75–3 per cent (for actively managed funds. A further charge of about 0.2 per cent covers legal, audit and other administration costs. Over time the annual fees have a larger effect in reducing the value of your investment than the initial charge. Typically, about one-third of the annual fee is paid to the financial adviser who recommended the fund.
Surrender charges. Early withdrawal from an investment will usually result in a surrender charge. Most of these fees are high at the earlier dates and lower when the investment is nearing maturity. Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years.
How much is needed to start
Mutual funds are just made to support small investors. Thus people who do not have enough cash to push huge funds into the market can take it from here. Its a good place to start and does not require so much to start.
In Ghana, the highest minimum you need to start investing in mutual funds is Ghs 100. Most funds require a start up of just Ghs 50 and others even require a minimum of just Ghs 20. The details of how much is needed and in which bank can be checked out in the fact sheet.
Where You can find mutual Funds
Mutual funds are offered by a category of financial institution called Fund Managers. In Ghana it is common to say that any financial institution is a bank, but mutual funds are not in every “bank”.
To make finding mutual fund companies easier, find in the list on next page some mutual funds we had the chance to review.
Basically mutual funds and unit trust companies are almost the same just that they have a varied name based on the legal structure. It is common we call all of them mutual funds but the right name to call them is Collective Investment Scheme.
Conclusion
Though mutual funds are good investments, we will advise that every investor will be informed enough to be able to make his or her own decision. All information about a particular fund can be found in the fund prospectus. An investor is free to ask for it from the fund managers and it will be made available to you. But should incase making meaning from that document is difficult for you, kindly contact us and we will help you understand some of those concepts.
The Informed Investor_ Brighter Future.
Check out the performance of mutual funds in Ghana and the various types of mutual funds discussed above with the various firms that offer them. Also look out for the fee structure of mutual funds here
By: Kenneth-Shine Adu
0248556177
Thank you