Finance - Mutual Funds

Mutual Funds

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There is a good reason why the specialised field of stock picking is best left in the hands of a stockbroker or investment manager: the risks associated with picking the right or wrong stocks are high. Due to this, mutual funds have been created in order to offer the investor a broader exposure to the market.

Known generally as "collective investments", the funds involved can be invested via different but similar structures, called Mutual Funds, OEICs (Open Ended Investment Companies), Unit Trusts and Life Funds. The process works like this: units or shares are issued to the investor for a share of the managed fund. Fund managers then spread the risk and take decisions to buy and sell the underlying assets for a profit.

For carrying out this task, a fund manager receives a percentage - usually one percent per annum - from the asset value. However, because sales commission can vary from one percent (OEICs) to five percent (Life Funds). Some brokers have arrangements to rebate back some of the commission in the form of extra units.

Most funds have geographic or sector preferences and a selection of fund types can be listed as follows: Liquid Funds: Invest in fixed term cash deposit accounts, with some funds adding a small sovereign bonds exposure. Considered the lowest risk category, many allow a two day liquidity access.

Bond Funds

Invest in Sovereign and Corporate Bonds in specific geographic regions. Some funds provide an income in the form of a distribution.

Equity Funds

Invest in equities around the world, depending upon the sector (blue Chip, emerging market, small caps etc) or region (UK, North America, Europe etc).