Low interest rates, low returns and rather bleak prospects for individual pension provision: Nowadays it is difficult to invest one’s savings. The classic forms of investing money, such as overnight bank loans, time deposits and passbooks, have not been generating significant interest for a long time. That’s why it makes sense to invest your money in mutual funds. Anyone who has never dealt with mutual funds usually has a lot of questions about them – but it’s not that difficult!
Many banks are close to bankruptcy. Investors worry about their assets; the next big financial crisis is just around the corner. A young Dutch entrepreneur has the brilliant idea: Why not pool the money of various private investors and invest in different securities as profitably as possible? The risk for investors is reduced by high diversification even if they hold small holdings and the allocation can be adjusted to the current state of the US stock market.
Since then, the operation of mutual funds has not changed much. Only the selection has grown significantly: Especially in the last few decades, the market has almost exploded. Many investors’ assets are invested in different securities and bonds worldwide. This does not make it easy for you if you want to start investing your money in stocks or mutual funds. What is the difference between the various mutual funds? Is my property safe? How much money should I invest? And above all: Which mutual fund should I invest in?
What mutual funds exist as an investment of money?
If you look around a bit, you will find that there are quite a few options on the market. They differ mainly in the investment categories.
Summary of mutual funds:
- Investment category: Mutual funds in shares, pensions, real estate, commodities or mixed
- Management based: Active or passive (index funds)
- Based on capital limit: Open or closed
- Distribution method: Distributive or savings
- Equity mutual funds include a collection of various stocks, which can perform quite differently. The risk varies with the mix and spread of stocks.
- Pension funds, the investment is made in pension securities or in bonds of companies or governments that wish to borrow money for a specific duration and interest. The longer the remaining duration of the bonds, the greater the fluctuation in value. Shorter tenures and secured debtors are safer.
- Real estate mutual funds are about investing in leased, commercial real estate, less often even residential real estate. Performance is therefore highly dependent on future rental income and building values.
- Commodity funds, as the name suggests, focus on commodities such as gold, silver, platinum, oil and gas. The investment is made in the raw materials themselves or in shares in companies in the raw materials sector.
- Mixed funds invest in different asset classes and are a mix of, for example, stocks, bonds, commodities and real estate.
- Index funds form a specific index, for example a stock index. Also, here there are various investment categories to choose from, apart from shares, pensions or real estate. They are also classified as passive as there is no fund manager managing the assets. These include, for example, ETFs (exchange-traded funds).
How to invest my money in mutual funds?
Primarily, one wants to get as much interest on their money as possible. A one hundred percent safe financial investment with low risk and at the same time great return unfortunately does not exist, – however your goals and preferences must be taken into account when choosing the mutual fund.
Which mutual fund should I invest in?
Investors have the responsibility of choosing. After all, no one would want to hand over their savings to a foreign fund manager and lose a lot of money in the worst-case scenario. Unfortunately, mutual development in the past is no predictor of the future. So how does one know where the best performance is provided?
It makes sense to take a closer look at the charges, for example, the ongoing cost of administration and commissioning, which are the only costs at the time of purchase. The so-called Total Cost Index (TCI) informs about the annual cost. Higher fees naturally reduce performance – at the same time, the most popular mutual funds combined with an experienced manager and good reviews are often a little more expensive than others. A cost comparison is useful, but you shouldn’t just look at the best price. Cheap is not always best!
Think in advance if you prefer to be safer or take more risk. For example, mutual funds offer a better chance of high returns than pension funds, but at the same time they are subject to higher fluctuations. As a general rule: The wider the spread, the lower the risk. Indeed, if individual investment values decline, they can be offset by others. Therefore, highly narrow investments, which are concentrated, for example, only in certain regions or industries, are riskier than more broadly diversified investments.
Ideally, you choose a mutual fund that invests in completely different industries and countries. For even greater safety, a pension fund with short maturity dates and bonds from as safe debtors as possible, such as sovereigns with good credit ratings, is also advisable.
Are ETFs more useful?
Since ETFs (Exchange Traded Mutual Funds) strictly track an index and do not need a manager, they are usually slightly cheaper than actively managed equity funds.
The downside to ETFs is that you need to get a good foundation first. The time investment here is quite high – both in planning, researching and choosing the ETF, and in the subsequent management of the investment. Necessary self-management carries the risk of emotional decisions. Thus, many investors react to short-term price declines with panic buying which causes large losses.
An expert, on the other hand, knows the market and probably has a feel for when it’s worth entering or exiting. Primarily in times of crisis and in the event of falling prices, the experience of a capital manager will benefit a sensible strategy for the various market conditions and he will turn in time to lower risk investment forms. In contrast, ETFs fall, like all index funds, in a one-to-one ratio with prices.
What you ultimately decide is a matter of character. If you have a little time on your hands and want something more convenient, a managed investment fund is probably the best option, where an expert will do the work for you. Is there perhaps a combination of the two options? For example, you can try self-managing your own ETF savings plan with small amounts. However, some priorities and issues cannot be achieved with ETFs since there is no corresponding index.
How does a savings plan work?
You can make a one-time investment, create a savings plan or combine both. In the case of lump sum investment, a large amount is invested straight from the beginning and generates interest.
If you don’t have a large amount at your disposal or you want to save regularly in addition to the one-off payment, you can create a savings plan. In this context, smaller amounts are paid at regular intervals, for example on a monthly basis. The amount of the savings rate can be readjusted later or even temporarily suspended.
Different buy dates compensate for market fluctuations and you don’t have to worry about when is the “right” time to enter.
How long should I invest in mutual funds?
The more the merrier! Mutual funds are a long-term cash investment and are therefore ideal for private retirement provision and future protection. The absolute minimum investment in equity mutual funds is seven to ten years, otherwise one would be forced to sell at an unfavorable time and lose money. To truly smooth out price fluctuations, a minimum of 15 years is recommended. Analyzes have shown: For an investment of 20 to 30 years fairly high rates of return can be achieved – despite the intermediate downturns and crises.
Why invest money in mutual funds – what are the benefits?
With the right choice and approach, this form of monetary investment offers some advantages:
- Mutual fund units are liquid, meaning they can be resold at any time if necessary.
- The risk is much lower than in individual stocks and can be minimized by wide diversification.
- You can invest in global, broadly diversified investments, even with small contributions, building long-term assets.
- You can place your money easily, leaving the procedures to an experienced mutual fund manager.
- Get higher interest and returns in the long run than with traditional investments like passbooks, overnight bank loans and time deposits.
- Your capital is invested for the long term, always adjusted to current price developments and even used sustainably if you wish.
Conclusion: Mutual funds as an investment is a good idea…
Not without reason, this form of money investment has become increasingly popular in recent years. Mainly due to the low interest rates of overnight bank loans, and time deposits. Mutual fund companies manage many billions of euros each year. In order to compensate for inflation, saving requires a certain return. Which does not make it competitive with other forms of investing money.
When it comes to financial investment, Analyst Ratings, Market News, one can no longer avoid mutual funds, shares and participation in the stock market. You don’t even need to have extensive financial knowledge or a huge budget. Already small contributions add up in the long term to a remarkable capital. It is certainly useful to formulate one’s wishes and ambitions in advance and to receive support from an expert.