Question: Like many people, my friends and I often talk about the current downturn: When it will end? Are things really that bad? And where are the opportunities in the market? One member of the group is adamant that investment in mutual funds is the surest way of protecting and building on investment. What are mutual funds, and how secure are they?
Answer: There are many people around the world mulling over the current financial situation. The idea of moving investments to mutual funds is often raised at this time due to the wide range of options, and the opportunity to spread risk.
Basically, a mutual fund collects money from many different investors, and pools the cash in a collective which invests in a range of stocks, bonds, and securities. This allows the fund to buy into investment opportunities with very good rates, which an individual may not be able to afford on their own. This investment is then controlled by a fund manager.
There are literally thousands of mutual funds on the market, with varying degrees of success. An independent financial advisor would be able to assess your current investment needs, and find a mutual fund on the market most suitable to your requirements.
You can select a fund which will track a leading stock market by purchasing shares in the majority of the companies listed there, or you could decide to follow emerging markets, Sharia-compliant investments, or ethical funds.
The right mutual fund for you will come down to a number of factors based on your current financial situation, and your long-term financial goals. Companies usually provide a grading system for their funds to offer a guide to the level of risk. You can also review the past performance of the fund, where the current investments are being made, and see the breakdown of how much of the fund is in stocks, how much is in bonds, and how much cash is free for future investment.
Probably the most important consideration is the fund's performance over time. A fund which has weathered previous difficult economic times, or has remained strong over the past year is more likely to provide the kind of return you require in the long run.
Mutual funds are seen as a long-term investment, rather than for short-term gain. You need to discuss with your independent financial advisor how you see your investment working for you, as funds pay back in different ways. There are funds which provide regular income in the form of dividends from shares, and funds which aim to grow your original investment, to make a final payment when the trust is liquidated.
You may be tied into a certain time-frame with many mutual funds, or there may be a charge to remove your money early from the scheme, so assess all of this with your independent financial advisor before committing to the investment.
As with any investment, it is worth remembering that low-risk does not mean risk-free. Many mutual funds are currently recording losses of anywhere up to, and beyond, 50 per cent for 2009 due to the economic downturn. Finding a fund which has shown a consistent management style and a solid performance could go some way towards protecting you from problems in the future.
- William Hewitt is a chartered financial planner and a district manager at Nexus, a financial adviser.
You can find more advice at www.nexusadvice.com
