Mutual Fund Investment: Benefits and Risks to Avoid
Have you ever heard of mutual funds investments? For the common society, the term mutual funds may still sound unfamiliar.
Mutual funds is an alternative for people who have capital (funds) but limited to be invested through Investment Manager Company. Funds collected by Investment Manager from people with limited capital will be divided into several types of investments (stocks, bonds, and/or deposits) and not just in one company, but several companies. Each mutual fund product has several different investment objectives, according to the type of investment product. Mutual funds is a practical choice for people to invest in shares even in several companies at once but with relatively little capital.
Know the Investment Manager Company
So what is an Investment Manager? The Investment Manager (IM) is a professional management firm that manages various types of investments ranging from stock investments, bonds, property, and other types of investments aimed at achieving investment targets that benefit investors. MI services are conducting financial analysis, asset selections, stock selections, implementing arranged plans, to monitoring investment. IM is also a party that plays an important role in managing investments in currency dollars, euros, pounds, yen, etc.
IM’s business activities cover a wide range of fields ranging from hiring professional investment managers, conducting research, performing order functions as well as trading or dealing, completing transactions, marketing, auditing internally, even preparing reports that will be provided to customers’ communities. The role of IM is better known as an agent or an intermediary between shareholder and company. In addition, MI is also tasked with being able to actively monitor the performance of companies whose shares are owned by IM’s customers. This is done because although theoretically shareholders have voting rights in the General Meeting of Shareholders (GMS) to control and suppress the management of the company, in practice does not run in accordance with the theory. Stockholders often do not exercise their voting rights because the ownership only has a small percentage.
Characters of Mutual Fund
Meanwhile, when talking about the characteristic of mutual fund itself, the character of mutual fund is divided into two, Open-ended and Closed-ended funds. Open-ended mutual fund is a type of mutual fund that can be sold again to IM who publish it without going through the trading flow applicable in the stock exchange. Usually the selling price of the mutual fund will be equal to the Net Asset Value (NAV). While the definition of closed-ended mutual fund is a mutual fund that can’t be sold again to IM who publish it. This type of mutual fund can only be sold again to other investors but must be through the flow of trading on the stock exchange. Usually the selling price of this mutual fund can be above or below the Net Asset Value.
Understand the Benefits of Mutual Funds
Probably many people think why not buy directly the common stocks in the stock exchange. There are several things that make mutual funds as an investment alternative that the public have interest in. Mutual funds provide benefits for investors in terms of monitoring investment at any time. This is the sole responsibility of IM. The public can choose the type of mutual fund that can be adjusted to the investment characteristics of each investor and also adjust the rate of return or reciprocity. The benefits as well as the advantages in choosing a mutual fund as an investment alternative include:
1. Managed by professional management
IM is a professional manager that has special expertise in fund management. Its role is very important because they serve investors who have only limited time and can’t research the company and its investment directly to analyze the price of securities and access information to the capital market.
2. Investment diversification lowers possible risks
Mutual funds are type of investment that are not only focus on one investment on one company. This will obviously reduce the risks involved even if they can’t eliminate them. In other words, the risks are not concentrated on one type of investment but diversified. Keep in mind that there are two types of possibilities in investing, gain and loss. If your mutual fund places investment funds in 20 companies and 3 of them are at risk of loss, investors do not have to worry because there is a possibility of dozens of other companies may not experience a loss or even risk of gain.
3. Transparency of information
This type of investment clearly provides information about portfolio development as well as ongoing costs. This is done so that Participation Unit holders can monitor the benefits, costs, and risks at any time. IM as a mutual fund manager is also required to announce the Net Asset Value every day in newspapers and publish semiannual and annual financial reports as well as regular prospectuses. With the transparency of this information, investors can also monitor the progress of their investments on a regular basis.
4. High Liquidity
Liquidity is the company’s ability to pay its short-term liabilities. The more companies have high liquidity, the more the company can be trusted because of its ability to pay short-term obligations very well. With high liquidity, investors can redeem their Participation Units at any time in accordance with the provisions made by each mutual fund.
5. Low Cost
Mutual funds are known as the set of many financiers and professionally managed. In line with the large ability to make these investments will result in efficient transaction costs as well. Transaction costs will be much lower than that of investors who invest directly in the stock exchange.
6. High Return Potential
Mutual funds are investment alternative that the benefits can be enjoyed in the long run and is perfect if used as an investment alternative that guarantees investors in preparing for retirement, preparing for education funds, and various other long-term plans.
As mentioned earlier that the level of mutual fund risk is low, it clearly provides better safety for investors compared to individual and direct investments in the stock exchange. The paid-in investment funds are also not directly held by the IM company, but deposited in a special bank account known as a custodian bank.
Understand the Weakness / Risk of Mutual Funds
When talking about risk issues, mutual funds also have it, where the value of the risk is clearly smaller than the stock investment, but greater than other investments such as gold investments, property products, or deposit products. Well, several things to note related to the weakness of mutual funds include:
1. Risk of Impairment of Net Asset Value
This is due to the market price of investment instruments decreased compared to the initial purchase price. This fall in price could be caused by many things : the performance of the stock market is deteriorating, the performance of the companies are worsening, the political situation and the unstable economy, as well as various other supporting factors.
2. Liquidity Risk
This may be due to Participation Unit holders withdrawing large amount of funds at the same time so that IM experiences rush. Usually this happens because of several large negative factors such as political and economic situation quickly deteriorate, the closure or bankruptcy of some companies, even the liquidation of IM as a manager of mutual funds.
3. Market Risk
Market risk occurs when the price of investment instruments decreases due to dramatically lower stock market performance.
4. Default Risk
This problem occurs when IM buy bonds owned by issuers who apparently have financial difficulties when previously the company’s performance is still okay. As a result, issuers are unable to pay their obligations.
Things to Consider Before Using Mutual Funds
Considering there are risks that could threaten your money in mutual fund investment, there are some things to consider before deciding to make mutual funds as an investment choice, among others :
1. It is advisable to invest at least 3 years of mutual funds so that investors can enjoy a better return. If you want a return within a period of less than 3 years, you should choose other investment alternatives such as fixed income mutual funds or investment deposits.
2. Do not forget to ask about the cost that may arise from the product of interest. Each product usually provides a different charge rate that is between 0 – 2%.
3. Most banks are mutual fund agents but not all products are available in the bank. Then you as an investor should be able to choose the best mutual fund.
4. Do not assume mutual funds have no risk. Consider the risks and potential benefits of your decision to choose a mutual fund.