greenieS
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Recourse to this form of investment is recommended for those who do not have advanced financial experience, the fund manager being the one who comes with the necessary experience. It is recommended to resort to such a form of investment because it is safer, involves a controlled risk and a diversification of the portfolio adapted to the risk tolerance of investors.
Any type of investment involves the existence of advantages and disadvantages. However, it is important to keep in mind that what is relevant or important to one investor may not be of any importance to another (or less important).
A. Among the most important benefits of investing through mutual funds are:
Professional management - given that investment selection policy, analysis and investment monitoring are performed by professionals who also have the time and resources and knowledge necessary to be allocated to a successful investment approach. By making investment decisions, they can amplify the effects of the fast periods for the markets to which the fund is exposed, or they can mitigate the negative effects when the markets evolve negatively.
Diversification - one of the best risk-spreading strategies - a strategy difficult to apply on one's own by an ordinary investor who does not have considerable sums of money - allowing him to invest in the securities of several entities - in the spirit of the well-known saying "Don't put all your eggs in one basket." Investments made in a large number of securities - of different types, or securities of the same type but of different eminences or from different industries - reduce the risk of bankruptcy for example.
Accessibility - an extremely important quality for investors who can not afford a large investment at once, but only the regular investment of small sums of money. In addition, access to markets where investments are actually made is significantly cheaper through a fund, which benefits from both low transaction costs, given its high values and volumes, as well as preferential commissions from intermediaries through which perform those transactions.
Liquidity - an important feature given that an investment in a fund usually offers higher returns than those brought by the classic bank deposits. Obviously, however, with equivalent-proportional risks, depending on the investment policy and the category to which the fund belongs.
B. By comparison, one of the most obvious disadvantages of such an investment is the following:
Management costs regardless of results - thus, investors pay the administration price, regardless of whether the fund has significant positive returns, or on the contrary evolves negatively. Thus, the management costs - charged by the management company, but also all other fees and commissions - such as those for the payment of the Depositary, ie the entity that verifies and certifies the accuracy of the fund's portfolio records, or those imposed by regulators, are paid regardless how the fund evolves. The same applies to subscription fees and redemption fees.
Lack of control over investments - due to the fact that an investor in a mutual fund cannot influence or change (as it could in the case of an investment made on its own account) the investment policy and strategies that the fund manager (SAI) imposed / proposed them through the launch document of the respective fund; nor the choice of moments / circumstances in which these operations are actually performed.
The risk of mismanagement - which is that the managers of the fund may make uninspired or wrong decisions that could lead to losses in the accounts of investors. To reduce this risk, however, the investor can follow the historical evolution of the fund in relation to other funds in the category to which it belongs, so that although past performance is not a guarantee for future, the investor can get an idea of the skills and managers' capabilities.
Any type of investment involves the existence of advantages and disadvantages. However, it is important to keep in mind that what is relevant or important to one investor may not be of any importance to another (or less important).
A. Among the most important benefits of investing through mutual funds are:
Professional management - given that investment selection policy, analysis and investment monitoring are performed by professionals who also have the time and resources and knowledge necessary to be allocated to a successful investment approach. By making investment decisions, they can amplify the effects of the fast periods for the markets to which the fund is exposed, or they can mitigate the negative effects when the markets evolve negatively.
Diversification - one of the best risk-spreading strategies - a strategy difficult to apply on one's own by an ordinary investor who does not have considerable sums of money - allowing him to invest in the securities of several entities - in the spirit of the well-known saying "Don't put all your eggs in one basket." Investments made in a large number of securities - of different types, or securities of the same type but of different eminences or from different industries - reduce the risk of bankruptcy for example.
Accessibility - an extremely important quality for investors who can not afford a large investment at once, but only the regular investment of small sums of money. In addition, access to markets where investments are actually made is significantly cheaper through a fund, which benefits from both low transaction costs, given its high values and volumes, as well as preferential commissions from intermediaries through which perform those transactions.
Liquidity - an important feature given that an investment in a fund usually offers higher returns than those brought by the classic bank deposits. Obviously, however, with equivalent-proportional risks, depending on the investment policy and the category to which the fund belongs.
B. By comparison, one of the most obvious disadvantages of such an investment is the following:
Management costs regardless of results - thus, investors pay the administration price, regardless of whether the fund has significant positive returns, or on the contrary evolves negatively. Thus, the management costs - charged by the management company, but also all other fees and commissions - such as those for the payment of the Depositary, ie the entity that verifies and certifies the accuracy of the fund's portfolio records, or those imposed by regulators, are paid regardless how the fund evolves. The same applies to subscription fees and redemption fees.
Lack of control over investments - due to the fact that an investor in a mutual fund cannot influence or change (as it could in the case of an investment made on its own account) the investment policy and strategies that the fund manager (SAI) imposed / proposed them through the launch document of the respective fund; nor the choice of moments / circumstances in which these operations are actually performed.
The risk of mismanagement - which is that the managers of the fund may make uninspired or wrong decisions that could lead to losses in the accounts of investors. To reduce this risk, however, the investor can follow the historical evolution of the fund in relation to other funds in the category to which it belongs, so that although past performance is not a guarantee for future, the investor can get an idea of the skills and managers' capabilities.
