What are mutual funds and how to make money on them

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

You can buy a part of the portfolio formed by the management company and expect that it will rise in price.

What is a mutual fund

A mutual fund - a mutual investment fund - is a portfolio that contains various valuable assets that have the potential to generate income.

From the point of view of the underlying asset, there are real estate mutual funds, market instruments, for example, stocks and bonds, as well as combined ones, which can be based on such extraordinary assets as wines, art objects, and so on.

Maxim Fedorov Vice President of QBF

As the name implies, a mutual fund is divided into shares that are sold. The buyer buys not a specific share or, say, a room, if we are talking about real estate, but a “piece” of the entire portfolio. It is managed by a professional market participant whose goal is to increase capital. For example, he buys securities in the portfolio or rents out real estate.

There are mutual funds for qualified investors and for unqualified ones. And they are somewhat different. But we will only talk about mutual funds for unqualified investors, that is, for ordinary people who want to invest their capital. Because qualified investors - professional securities market participants and organizations - know everything themselves.

How to make money with a mutual fund

Units do not imply intermediate income. Investments in mutual funds cannot simply be taken away in whole or in part. You can get money in two ways:

1. Repay the share - and the management company compensates for this with money.
2. Sell your share to another investor.

The first method is simpler, however, the repayment will take place at the current value. You can bargain with a buyer, but you still need to find him. For this, it is allowed to involve intermediaries, such as brokers.

Shares can not only be sold, but also bequeathed or donated.

What are the advantages of mutual funds

Opportunity to buy high-value assets

According to Maxim Fedorov, it is rational to consider a share as a share of a diversified portfolio, which sometimes includes quite expensive instruments. For example, a mutual fund may include shares worth several hundred thousand each. And the share will cost only 5-10 thousand rubles.

Resilience during periods of increased market volatility

Due to diversification, mutual funds are able to show greater resilience than individual instruments or portfolios collected by ordinary investors.

All this makes mutual funds quite attractive for clients, including those owners of capital who first turn to modern financial instruments.

Maxim Fedorov

Ease of controls

The investor invests money, and the management company takes care of the contents of the portfolio.

Potentially high yield

If the portfolio is well balanced, then it is capable of showing significantly higher returns than a bank deposit.

Tax incentives

If you have owned a share for more than three years and purchased it in 2014 or later, then you do not need to pay income tax upon sale or redemption.

What are the disadvantages of mutual funds

High commissions

The management company does not handle the portfolio for free. She takes money for her services, and rather big money. Moreover, the commission will have to be paid regardless of the financial result: it does not matter whether the portfolio has risen in price or not.

As a rule, commissions are even included in the share price. A share equivalent to 1,000 rubles is sold for 1,003 or 1,005 rubles.

Maxim Fedorov

Profitability is not guaranteed

Even if a mutual fund has shown good returns in the past, this does not provide earnings in the future.

How to buy a share in a mutual fund

You can purchase units of a mutual fund at the office of the management company or its agent, for example, a bank.

By law, the funds of shareholders are protected from off-market risks, that is, the management company cannot deliberately bankrupt the fund. At the same time, protection from market fluctuations is provided only by the professional actions of the manager. Therefore, it is important to contact mutual funds of companies with extensive experience, developed infrastructure and a decent reputation. It is good when we are talking about a participant in the financial services market, awarded by the professional community and having renowned analysts on its staff.

Maxim Fedorov

After you have chosen a mutual fund and a management company, you need to write an application for the purchase of a share.

Another option is to purchase a share of the portfolio from another shareholder. The transaction is formalized by a purchase and sale agreement, which must then be shown to the registrar in order for the investor to be entered in the register.

How does a traditional mutual fund differ from a stock exchange

In addition to mutual funds, there are also BITIFs, that is, exchange-traded mutual investment funds. Both are formed portfolios, parts of which can be bought. The difference is that the shares of a traditional mutual fund are sold by the management company, while the shares of a stock exchange, of course, are sold on the stock exchange.

Shares of exchange-traded mutual funds are created in accordance with any indices, for example NYSE, NASDAQ, Moscow Exchange, and are sold directly on exchanges. Their liquidity is higher than the liquidity of ordinary mutual funds.

Maxim Fedorov

In addition, exchange-traded share portfolios are more profitable in terms of additional costs. Traditional mutual funds may have more significant commissions, because for their formation, management companies are forced to turn to the services of brokers, purchasing securities separately.

In fact, exchange-traded mutual funds are the same ETFs (that is, exchange-traded investment funds), only of domestic origin. On the Moscow Exchange, they are listed in one section.

What to remember about mutual funds

1. This is a portfolio of valuable assets. A special company is involved in the formation and management. Shares, that is, "pieces" of this portfolio, are sold to investors.
2. Mutual funds can show good profitability, but no one guarantees earnings. Although, in general, it is beneficial for all participants that the portfolio becomes more expensive.
3. High commissions can eat up a significant portion of an investor's income. Therefore, it is important to pay attention to their size when choosing a mutual fund and a management company.
4. But it is easy to invest in a mutual fund: someone else manages the portfolio, and you can become a co-owner of those assets that you cannot afford separately.
5. Exchange-traded mutual funds are closer to ETFs and are often more profitable than traditional mutual funds.