A Beginner's Guide to Mutual Funds

DUBAI, UAE – (ARAB NEWSWIRE) -- Lately, mutual funds have evolved as a potentially profitable investment option. Financial advisors consider it a well-diversified, tax-efficient way of growing money, especially for amateur investors. Fund managers professionally manage mutual funds by pooling money from investors and creating a fund with stocks that may yield potential good returns. This minimizes the need for investors to manage these investments actively.

 

What Is a Mutual Fund?

A mutual fund is an investment option that pools multiple investors' money to purchase large portfolios of stocks, bonds, and other securities. The collective holdings of stocks, bonds, and other assets are known as the fund's portfolio. Mutual funds help investors diversify their investments by investing in a wide range of asset classes and securities so that they can minimize the risk to their portfolio even when the market fluctuates.

Types of Mutual Funds 

Typically, mutual funds in the UAE fall into four categories:

• Stock Funds – Invests primarily in stocks, synonymously known as equity funds. 
• Bond/Debt/Fixed Income Funds – Generates fixed monthly income by investing in government, municipal, corporate, and convertible bonds. 
• Balanced/Hybrid Funds – Comprises debt and stock or equity components in a single portfolio with a specific ratio for each type. 
• Money Market Funds – Comprises high-quality, short-term securities that aim to provide high liquidity to investors with a lower level of risk.

Since mutual funds are professionally managed, they can be further classified into the following:

• Actively Managed Funds - Professional fund managers manage this category of mutual funds to outperform the Benchmark Index. Actively managed funds benefit from the expertise of professional managers, thereby levying a fee for the same. 
• Passively Managed Funds - This category refers to investment holdings replicating and monitoring benchmark indexes. They typically have lower fees or expense ratios. 

 

How to Invest in Mutual Funds?

Individuals can start investing in mutual funds efficiently by following the steps below:

• Open an investment account with a bank or Asset Management Company
• Fulfill the Know Your Customer (KYC) requirements as recommended to complete the investor's profile
• Once the account is opened, investors can start investing by buying or selling mutual funds
• One can also start investing in mutual funds as a lump sum or a Systematic Investment Plan (SIP). A SIP allows the investor to invest through smaller installments at monthly intervals, and it can be a feasible option if an investor does not want to invest a large sum of money at one go

By logging into their investment account, investors can check their investment details, performance, fees, and other information. As the mutual fund market has many options, investors should explore the market to understand the different types of schemes available and align them with their investment objective, risk appetite, and affordability to understand the best suitable scheme. Investing in mutual funds may involve certain costs like advisory fees, investment management fees, operational costs, etc., which customers should be aware of.

 

How Do Mutual Funds Make Money?

Investors can make money through dividends and capital gains by investing in mutual funds. Some mutual funds provide dividends based on the performance of their stocks. Investors can generate potential returns if they choose to invest in dividend-yielding mutual funds. Many asset management companies also offer an option to reinvest their dividends, allowing investors' money to grow.

Mutual funds also allow investors to earn via capital gains. Like stock markets, investors purchase a mutual fund at a specific price. When the price of those units increases in the future, one can sell them and earn a profit.

Conclusion

According to a well-known financial proverb, "To become wealthy, you need to be able to make money even while you sleep." Mutual funds materialize this saying. A lump sum investment can help investors gain from the investment when the value of the fund increases. When investing in a Systematic Investment Plan, a specific amount of money is invested every month, and an individual can see their investments grow. It might be a slow start initially, but with time, it may increase significantly. So, set goals, choose the right funds, and start investing!

 

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