Understanding mutual fund as a unique investment option

Over the past few weeks, we have been sharing knowledge about investment, and the numerous available product options or assets classes. Simply put, we have been exploring various avenues where one can invest and earn a good return.

Good returns are indeed subjective, but the fact is that every investor has an investment objective for investing. Once the said objective is met, good news! We have already discussed fixed deposit and its impact on your investment portfolio. Today, we want to consider mutual funds.

What is a mutual fund(s)?

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, or a combination of both. They are managed by professional fund managers who make investment decisions on behalf of the investors in the fund. There are several types of mutual funds with their unique investment objectives, which lead to the investment strategy the fund manager will use to achieve the desired returns. Always, remember that your investment objective determines the asset selections and risk management strategies to use.

There are different types of mutual fund strategies like money market mutual funds, fixed income mutual funds, equity mutual funds, balanced mutual funds, sector mutual funds and so on. We will explain these various mutual fund management approaches and strategies in our future articles.

Now that we know what a mutual fund is, let us assess some key features and benefits of mutual funds in an investment portfolio:

Diversification.

We can never stress enough the need for an effective diversification technique. Diversification is an important tool for risk management. Mutual funds as an investment asset offer the same to investors. Yes, mutual funds offer built-in diversification by investing in a variety of securities across different asset classes and industries. This diversification helps reduce the impact of individual security performance on the overall portfolio.

By investing in a mutual fund, investors gain exposure to a wide range of assets, which can help mitigate risk. This is a very good asset choice for retail investors.

Professional Management of the fund

Mutual funds are managed by experienced investment professionals who conduct research, analyse market trends, and make investment decisions on behalf of the fund. The expertise and knowledge of these fund managers can be advantageous for investors who may not have the time, resources, or expertise to manage their portfolios effectively.

Access to Various Asset Classes

This is the third feature of mutual funds. Mutual funds provide access to a wide range of asset classes that may otherwise be difficult for individual investors to access or invest in directly. Let’s say a client has only GHS100 to invest, he or she has 2 options; buy a few shares in one listed company or invest in a pooled fund that has several different assets from different markets.

The second option is the best because of the several assets in one pooled fund. These asset classes can include stocks, bonds, money market instruments, international securities, or even alternative investments. This allows investors to diversify across different types of investments based on their risk tolerance and investment goals/objectives.

Affordability and Accessibility

The is the fourth feature. Out of several investment assets, mutual funds typically have low minimum investment requirements, making them accessible to a wide range of investors. This allows individuals with limited initial capital to participate in a professionally managed investment portfolio. Also, Mutual funds provide the ability to invest through regular contributions, making it easier to establish a disciplined savings and investment plan for the long term.

Liquidity

Liquidity is very important in investment and it’s the fifth feature. Indeed, mutual funds offer liquidity, which means investors can buy or sell their mutual fund shares on any business day at the fund's net asset value (NAV). This makes it relatively easy for investors to convert their investments into cash when needed, providing a higher level of liquidity compared to certain other investment options available.

Transparency and Reporting

When it comes to investment, Transparency and Reporting are very important, and the same applies to mutual funds. Mutual funds are required to provide regular reports to investors, including information about the fund's performance, holdings, expenses, and other important details. This transparency allows investors to stay informed about their investments and make informed decisions about the fund.

Regulatory Oversight

The final and perhaps the most important feature is Regulatory Oversight. Just as any regulated investment assets, Mutual funds are also subject to regulatory oversight and must adhere to specific regulations and guidelines to protect the interests of investors. Regulatory bodies like the SEC monitor the activities of mutual funds to ensure compliance with industry standards and safeguard investor interests.

Investment carries some levels of risk so it’s essential to note that mutual funds are subject to market risks and may experience fluctuations in value depending on the asset types or the mutual fund type. Additionally, mutual funds charge fees and expenses, such as management fees and operating expenses (front & back load), which can impact investment returns.

Before investing in a mutual fund, it's crucial to carefully review the fund's prospectus, and consider investment objectives, risk factors, and expenses, while you assess how the fund aligns with your investment goals.

Even though many investors in Ghana and most of the African countries try to manage their investments, which is fine I still advise that you consult with a licensed financial advisor or investment professional like myself to help you select mutual funds that best suit your investment objectives and risk tolerance. We can also provide personalized guidance and help construct a diversified portfolio that includes mutual funds tailored to your needs.

EcoCapital Investment Management Ltd has three mutual fund products under management, namely; EcoCapital Prime Fund, EcoCapital Nordea Income Growth Fund and EcoCapital Weston Oil & Gas Fund.

We are a company incorporated in Ghana, and licensed by the Securities and Exchange Commission (SEC) as an Investment Management firm, and by the National Pensions Regulatory Authority (NPRA) as Fund Manager of both second and third tiers pension schemes.

The corporate mandate of the firm is to provide premium financial solutions and investment management services to both retail and institutional investors in Ghana. Services on offer at EcoCapital include Wealth Creation and Management, Investment Portfolio Management, Pension Fund Management, Mutual Funds, Retirement Planning, Investment Research and Advisory.

For a deeper understanding of this subject and further assistance on how to invest in a mutual fund, kindly contact EcoCapital Investment Management Ltd., at +233(0)50 155 3502.