How Do You Make Money through Mutual Funds? Its Benefits and Drawbacks

Mutual Fund and Unit Trust, are they the same?

A mutual fund is a fund of the group of investors who pool their money into a single legal vehicle to invest in assets such as stocks, bonds, and other types of commercial paper. The professional manager runs the fund and has a stated goal in its selling agreements.

However, people are often confused between the term of mutual fund and unit trust. The unit trust is a unique entity that employs a trust structure over the fund company. Investors are the trust’s beneficiaries, and the trustee employs professional management. Unit trusts have more investment flexibility than mutual funds, and they can buy real estate or other non-securities assets.

The different use of the name “mutual fund” and “unit trust” is just a matter of terminology in different countries. A mutual fund is a term used in the United States, whereas unit trust is used in the United Kingdom. In some countries like Malaysia, Indonesia, Taiwan, and South Africa, people know funds as unit trusts. In Malaysia, for example, all legitimate mutual funds are required to establish a trust. This means that the fund company’s owners can handle the money, but they can never take it into their own hands because the money belongs to the trustee and not to them.

How does mutual fund secure your investment

A mutual fund invests in various securities to meet the mutual investment objectives of its investors. The fund company then invests the funds in various asset classes such as shares and bonds based on the investment objectives. The fund manager made these investments on behalf of the investors. The mutual fund’s manager selects the securities to invest the investors’ money and follow the clearly defined investing objectives.

When the investor purchases any company’s stock in stock trading, he owns partial ownership of its assets. Similarly, when an investor buys this type of securities, he buys partial ownership of the mutual fund and its portfolio.

For instance: Imagine as an investor you bought both Apple’s stock and shares of a mutual fund that invested in Apple stock as one of its portfolios. In a year, Apple stock prices decreased because of the covid-19 pandemic. So, you have lost money by investing in Apple because you invested half of your money in only one company. On the other hand, you lose much less by investing in the mutual fund because Apple stock is just a tiny share of your fund’s portfolio.

Benefits of mutual fund investment

Mutual funds are popular among investors for a number of reasons, including:

  • Diversification; Mutual funds offer diversification whereby the manager can choose a wide range of asset classes.
  • Convenient; investors can avoid complicated decision-making situations when investing in mutual funds, unlike stock, where investors have to dedicate a lot of time studying the market.
  • Cost-efficient; the trading costs are generally divided among all investors.
  • Liquidity; Investors can promptly cash out. For example, investors get their money back based on Net Asset Value (NAV) in open-ended investments; while the close-ended funds can be traded in a stock exchange.

 Disadvantages of investing in mutual funds

  • Fees. In mutual fund transactions, there are a variety of fees and expenses.
  • Less predictable income. Investing in mutual funds is less predictable than investing in a predictable time deposit. This is because he performance of individual equities in the portfolio determines the success of mutual funds.
  • No opportunity to adjust. Unlike an investor who chooses individual assets (stocks or bonds) on their own, the fund manager is the one who choose the assets. As a result, investors do not have the authority to choose the mutual fund’s composition.
  • Load. This term means “sales charges” or “commission.” There are two kinds of commission; they are front-end-load and back-end load. A front-end load is a commission paid by investors to the broker or manager at the time of purchase of stock. The money is removed from the investor’s account and is computed as a percentage of the total amount invested.

Back-end load; As the name implies, this is the sum that the investor must pay upon redeeming their shares. The commission is based on the length of time that the investors have held their shares. The longer the investors hold the shares, the lesser the commission would be.

Considering how the mutual fund work for you, its benefits, and drawbacks, you can match your investment with your risk profile. Many beginner investors choose mutual funds because it requires lesser effort to manage and learn. However, it would be best if you also considered the drawbacks that go along with it.

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