Key Points
- funds
- mutual funds
You have probably heard a family member or friend talk about mutual funds without really understanding what they were talking about.
They have become one of the most popular investment vehicles in recent times, so you cannot afford to be left without knowing what they are and how they work.
We could say that a mutual fund is created when a group of people with similar investment objectives contribute their money for a professional to manage, investing in a diversified portfolio of assets. In other words, instead of being you who chooses the assets, you pay a commission to a portfolio manager to do it for you.
Many times it happens to us that although we have the knowledge, we do not have the necessary time to devote to monitoring our investments. This is when this collective investment tool becomes a very good alternative. In developed countries, funds are widely used and constitute one of the most important financial sectors by the volume of assets they manage. To give you an idea of the magnitude, they can handle more volume than banks or insurance companies.
Alright, you have decided to invest in mutual funds, but what comes next? Just like when you buy apples at the market, in the case of mutual funds you buy shares and the price you pay for them is the share value. It is said that when you send money to invest, you subscribe to shares and when you withdraw it, you redeem shares.
Daily, the assets that make up the fund generate a result, either by the quotation of each instrument at the close of each day or by the result of trading. In any case, what you need to understand is that all the results of the operation are included in the share value, as well as the commission of the administrator, that is, this is already included in the price of the share.
ou must know that there are different types of funds according to the assets that make up their portfolio, so we will tell you in the following section how we can classify them:
Open-end funds In them you can subscribe (buy) and redeem (sell) shares at your discretion. They are not quoted on Stock Exchanges or Markets, the participations are redeemed through your mutual fund management company.
Closed-end funds These are those whose shares are quoted on stock exchanges and markets and therefore their liquidity depends on supply and demand. In this case, the number of shares is limited.
Funds can also be classified into other categories according to the assets they invest in:
Liquidity Funds (Money Market): If you want to invest in a very conservative way, you can do so in liquidity funds, as they are ideal for those who want to invest their money in the short term, with immediate liquidity and free from price fluctuations.
Bond Funds or Fixed Income Funds: If you have already decided that you will not need your money in the short term and you have a little more tolerance for risk, bond funds or fixed income funds represent a medium / long-term investment with moderate returns and price fluctuations.
Mixed Funds: As its name suggests, they combine different percentages of financial assets, such as bonds, stocks and fixed terms. The stock component gives the fund a little more price volatility than fixed income instruments. In this way, the risk and return will depend on the behavior of each of them.
Stock Fund or Variable Income Fund: When your investment horizon is focused on the long term and you have greater tolerance for risk, such as if you are 30 years old and investing for your retirement, investing in stock funds can be very interesting. These funds have potentially high returns and are subject to the price fluctuations of the stock markets.
