Mutual funds are extremely popular these days. In particular, they are one of the most popular investments on the market today in the world. What does that mean in numerals? There are over 100,000 different funds with over assets market size was valued at $54.93 trillion in 2019, and is estimated to reach $101.2 trillion by 2027.
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Why are Mutual Funds so popular?
Why are Mutual Funds so popular? For some, it is because of their great returns over a long period. Others like funds because mutual funds are easy to buy and sell. Still others like them because they are diversified and less risky in today’s market.
Although fund managers of any mutual funds houses would like you to think so, mutual funds are not as complicated as they first seem to you. But here this article gives an introduction to mutual fund investing.
Mutual Funds
A mutual fund raises money from investors to invest in stocks, bonds, and other securities in multiple numbers of areas. It is a package made up of several individual investments, who can’t invest in all companies together. When those investments gain or lose value, your investment gain or lose as well. When they pay dividends, you get a portion of them.
Mutual funds also offer professional management and diversification in your portfolio. They do much of your investing work for you in long term.
Mutual funds have been around since the 1800s but didn’t become what we know today until 1950. Even then, they did not become a household word until the 1990s, at which time the number of individuals owning them tripled. A recent survey shows that more than 88% of all investors have at least some of their money in mutual funds due to SIP and low-risk factors.
Mutual Fund Companies
A mutual fund is a special type of company that pools together money from many investors and invests it on behalf of the group of investors, in accordance with a stated set of objectives.
Mutual funds raise the money by selling shares of the fund to the public investors, much like any other company can sell stock in itself to the public. Funds then take the money they receive from the sale of their portion of shares (along with any money made from previous share investments) and use it to purchase different investment vehicles, such as stocks, bonds, and money market instruments to diversify the portfolio.
In return for the money they give to the fund when purchasing any shares, shareholders receive an equity position in the fund and, as a result, in each of its underlying securities. For most mutual fund houses, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate every day, depending upon the performance of the securities or stocks held by the mutual fund companies.
Picking any funds
Most investors pick mutual funds based on recent fund performance, the recommendation of a friend, and/or the praise contributed to them by a financial magazine or fund rating agency. While using these methods can lead one to select a quality mutual fund, they can also guide you in the wrong direction and wondering what happened to that “great pick.”
Despite the distinguishing characteristics of mutual funds – performance, management philosophy, & investment objectives – your specific selections should be chosen within the context of your overall financial goal.
Examining features such as past performance are not where your analyses should begin. The point of deviation is you; your financial priorities; your resources; your approach to investment diversification; your willingness (or lack thereof) to assume market volatility; and your time horizon for a particular investment in any mutual funds.
Returns in Mutual Funds
Total Returns are fun to look at and boast about, but simply looking at a fund’s total return for the past year is not necessarily a good estimation of a fund’s quality.
For example, investors usually talk about how well a distinct fund did last year and how happy they are with that performance – say a 16% return in an equity income fund. Well, in a given year that may or may not have been a good return for an equity revenue fund. That fund may have underperformed many or most other equity-income funds for the year.
Returns should always be measured in context with how other comparable “categorized“ (e.g.. equity income funds, growth funds, small-cap funds, etc.) funds have performed over the years. So don’t get overly excited by a fund’s total return until you see how it corresponds to other similar funds over the same period.
As it is often said, past performance can’t predict future outcomes. But when comparing the performance of any funds, it is also wise to look beyond the results of one or two years and more. Most experts recommend that a larger “window” of 5 to 10 years gives a more transparent picture of historical performance.
Has your fund or the one you are considering performed well over this longer time horizon (long term window)? Any mutual fund can have one good or one bad year, but if you are investing for the long term, you want a fund that has a constant track record.
While that record doesn’t guarantee future outcomes, it gives you an indicator that may be to your advantage and the performance of your mutual funds.