Mutual Funds can make a great Investment, and are a good way to start building a portfolio. Especially if you have little or no experience in the stock market.
In this post, I cover the basics, to hopefully shed some light on what a Mutual fund is, and how you can get started investing.
What is Mutual Fund?
Essentially, a Mutual Fund is an investment product, made up of an investment pool funded by individual investors. The pool is invested into a variety of different securities, known as a portfolio. The portfolio is then professionally managed by a Fund Manager. The Fund Manager does all the research, purchasing, and performance monitoring.
What are the key benefits of a Mutual fund?
1. It’s a very Hands off investment
The Fund Manager will take care of all the hard work. Whereas if you were building your own stock portfolio, you would have to do all the research, purchasing and performance monitoring yourself. This makes it a very hands off investment, which is why Mutual Funds are great for first-timers (But also great for those of us who have been investing for a while!).
2. It’s an Easy Way of Diversifying Your Investments
Funds are made up of many different assets from a wide range of companies, sectors, and countries.
This makes them a safer investment as you are not leaving your fate tied to one company. For example if you only invested in shares of one company, and that company went bust, you would lose everything. But with a mutual fund your investment is spread across multiple companies, so if one goes out of Business, the others would keep you from losing everything.
Example of splits below. This is the current split of the Lindsell Train Global Equity fund (as it’s one of my best performing investments).
3. You Don’t need Much Capital to Get Started
You can invest in Mutual Funds from as little as £50 a month with a Direct Debit, plus you can adding to your investment.
4. Some Mutual Funds Pay out Dividends (Some as high as 8%!)
A Fund can earn income on Stock Dividends or Interest from Bonds. Funds which have the word ‘Income’ in their title payout this money to their Shareholders in the form of dividends. Depending on the Fund, dividend payments are made yearly, quarterly, or even monthly.
5. You can use a Stocks and Shares ISA to purchase Mutual Funds, and protect them from the Tax man
If you invest in Mutual Funds using a Stocks and Shares ISA you won’t have to pay tax on any Dividend income, or profit from selling your Fund shares. This is a huge benefit and means that when it’s time to cash in your profits you get to keep them all.
What are the negatives of Mutual funds?
There are fees
Okay, so fees are the main negative of Mutual Funds. These are to cover the cost of a professional Fund Manager looking after the investment. That being said, there is no reason to pay more than 1% on your investment.
For example my best performing Fund this year is the Lindsell Train Global Equity Fund. for the first half of this year (2018) it has gone up over 11%, and the fees are only 0.54% (This is a discounted rate I got through Hargreaves Lansdown).
So with most funds the benefits and returns justify the additional price you pay for Professional management.
How do I Pick What Mutual Fund to Invest In?
There are thousands of Mutual funds to invest in, so how do you figure out which ones are right for you? The best starting point is to figure out what objective you are trying to achieve with your portfolio. For example, are you looking for a long term investment with big growth potential, or are you looking generate a regular income stream through Dividends?
Once you have figured this out, i’d then recommend this handy tool on the Hargreaves Lansdown site. You simply select the objective you are trying to achieve and the tool generates a recommended portfolio.
How do I Invest in a Fund?
You can invest in a fund directly, through a bank, or via a brokerage firm. I personally use Hargreaves Lansdown as they have a really easy user interface plus a great app which lets you manage all your investments on your phone.
For beginners it’s a great platform as they guide users through every step. They also have a team of researchers who constantly evaluate a report on the best funds. Funds recommended by Hargreaves Lansdown have a ‘Wealth 150’ stamp next to them, and this means they have met a certain standard and have a good track record.
As mentioned above, another Benefit is Hargreaves Lansdown is they have reduced fee rates on a large number of Funds. So you end up paying less on your investments vs other brokerage platforms. The savings may be small to start with but they add up as your equity begins to grow.
What have I missed?
Thanks for taking the time to read the above! I have tried to make it as simple as possible, only keeping in the key details that I found useful when starting out. However i’m sure there are things others would find useful, so if you have any suggestions please leave a comment below:)