Investors are always looking for ways to diversify their investment portfolio to limit their risk exposure. However, taking large positions in individual securities requires paying fees and commissions that many investors cannot afford.
Fortunately, mutual funds provide an easy shortcut to portfolio diversification by allowing investors to participate in a wide selection of asset classes such as stocks, bonds, commodities and other securities.
Mutual funds can be purchased from a mutual fund company, a brokerage firm, or a bank.
If you prefer to invest where you bank, Abu Dhabi Commercial Bank (ADCB) offers a selection of premium international mutual funds services in the UAE, in addition to wealth management, equity, real estate, and beyond.
But the question is: Are mutual funds right for you? Let’s take a closer look at what mutual funds are, and why they have become a popular choice among investors.
What Is a Mutual Fund?
Simply put, a mutual fund is a professionally managed investment portfolio that allows investors to pool their money together to invest in different financial securities.
Mutual funds can be considered a basket of investment. Each basket consists of dozens or hundreds of asset classes, such as stocks, bonds, commodities, and more. This means when you buy a mutual fund, you are buying a basket of financial instruments.
Whether you are a novice investor and want to know why mutual funds can be a good fit for your investment needs and lifestyle, or if you’re a professional investor and want to include mutual funds in your portfolio, below are some of the many benefits you need to know.
Advantages of Mutual Funds
Ever heard the saying about not putting all your eggs in one basket? It’s become a valuable metaphor for explaining the importance of portfolio diversification.
Mutual funds can contain hundreds or thousands of asset classes, which can effectively mitigate performance and reduce specific investment risk.
Novice investors may lack the financial know-how to manage their investment portfolios. Fortunately, they can take advantage of mutual funds.
When you buy a mutual fund, you pay a management fee as part of your expense ratio, which is used to hire an expert portfolio manager who buys, holds, and sells securities. This allows investors to receive the best return on their investment.
The key benefit of investing in a mutual fund is that you can redeem your unit holdings at any point in time. Mutual funds have flexible withdrawal but factors like exit penalty and exit load should be taken into account.
Ease of Investment
If you were investing on your own, you would spend more time researching single financial instruments and allocating investments. Thanks to their ease of access, mutual funds allow you to diversify your investments globally at a relatively lower cost.
The Bottom Line
Mutual Funds have both advantages and disadvantages. The advantages of investing include diversification, ease of access and expert management for your investment portfolio.
An investment in mutual funds, like any other investment, doesn’t come with any guarantees. So before deciding to invest in mutual funds, it is essential to examine its downsides as well as your financial goals and risk tolerance levels to determine if it’s the right investment for you.