The ABCs of Mutual Funds
By James Abola
We often hear about offshore investment and mutual funds but what do they actually mean. The term offshore indicates something foreign or outside a domestic territory. Offshore investing or alternative investing is conducting financial business outside of the investor’s home country or home currency. Most offshore investments offer high returns, low or no taxes and a high level of confidentiality.
Dictators and corrupt politicians in Africa have given a bad name to offshore investing for many Africans. Most people have heard stories of politicians who steal resources from their countries and go and deposit it in numbered Swiss Bank accounts.
Both global and national developments in the financial sector have made it more difficult for the so called blood money to be stashed away by politicians. These same developments have opened opportunities for honest citizens to participate in offshore investment.
One of the main offshore investment vehicles is the mutual fund. A mutual fund is a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund has a fund manager who is responsible for investing the pooled money into specific securities usually stocks and bonds. When you invest in mutual fund you are buying shares or units of the mutual fund and become a shareholder of the fund.
One of the many beauties of mutual funds are their cost efficiency and ease to invest in. Mutual fund investors do not have to worry about which share to buy and which one to leave; all that worry is left to the fund manager. By pooling money together in a mutual fund investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own.
The biggest advantage of mutual funds is diversification, or putting eggs in different baskets. Diversification is the idea of spreading out your money across many different types of investments. When one investment is down another might be up. Diversification reduces risks greatly. Each mutual fund is set up in such a way as to buy multiple stocks. Further diversification can be achieved by investing in different mutual funds that in turn invest in different stocks and bonds.
To invest in mutual funds you have to go through an investment advisor who will in turn link you up with a fund manager. The investment advisor will work with you to define the investment goal and establish your risk tolerance. An appropriate fund or funds are then chosen accordingly. Usually the investor is required to make regular, in most cases monthly, payments to the fund manager for a period of at least 15 to 18 months and to maintain the investment for a minimum period. Both the amounts and periods are usually defined so that the investment is beneficial to both the investor and the fund manager.
Ugandan investors must insist to know if the investment advisor they are dealing with has been licensed to offer such services by the Capital Markets Authority. In the past unscrupulous people have pretended to be investment advisors and fleeced many unsuspecting individuals. And under no circumstance should an investment advisor act as a conduit for transferring your investment funds to a fund manager.
There are many possible reasons why one could consider investing in mutual funds. Two of the most common and applicable reasons in the Ugandan or even East African context are education and retirement planning. A parent with children in secondary school, primary school or even nursery school should be paying the current fees while casting an eye on the cost of college education. It can be a difficult if not impossible task to pay many children through University while drawing from salaries or business income. If the parent planned early and invested money in a mutual fund over a period of time the cost becomes more bearable not only because of the higher return but other factors including the power of compound interest and the relatively lower risk of mutual funds.
A similar reason to education planning also applies to retirement planning. Both individuals and institutions can use mutual funds or specific funds known as pension funds to invest funds for retirement. The benefit afforded by this investment include use of more stable currency, and ability to invest for a longer time frame and also that the fund has known track record. Some funds have been operating for over 100 years.
As it is always said in the world of investment, past performance is not an accurate indicator of future performance. So even if a fund made an average return of 40% in the past 5 years that might not be the case for the next 5 years. It is also always advisable to talk to a financial advisor before committing funds to an investment.
Note
This article has been written to provide general information and education and should not be taken as an investment advice. Readers are strongly encouraged to seek professional advice before undertaking, postponing or cancelling any investments.
We often hear about offshore investment and mutual funds but what do they actually mean. The term offshore indicates something foreign or outside a domestic territory. Offshore investing or alternative investing is conducting financial business outside of the investor’s home country or home currency. Most offshore investments offer high returns, low or no taxes and a high level of confidentiality.
Dictators and corrupt politicians in Africa have given a bad name to offshore investing for many Africans. Most people have heard stories of politicians who steal resources from their countries and go and deposit it in numbered Swiss Bank accounts.
Both global and national developments in the financial sector have made it more difficult for the so called blood money to be stashed away by politicians. These same developments have opened opportunities for honest citizens to participate in offshore investment.
One of the main offshore investment vehicles is the mutual fund. A mutual fund is a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund has a fund manager who is responsible for investing the pooled money into specific securities usually stocks and bonds. When you invest in mutual fund you are buying shares or units of the mutual fund and become a shareholder of the fund.
One of the many beauties of mutual funds are their cost efficiency and ease to invest in. Mutual fund investors do not have to worry about which share to buy and which one to leave; all that worry is left to the fund manager. By pooling money together in a mutual fund investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own.
The biggest advantage of mutual funds is diversification, or putting eggs in different baskets. Diversification is the idea of spreading out your money across many different types of investments. When one investment is down another might be up. Diversification reduces risks greatly. Each mutual fund is set up in such a way as to buy multiple stocks. Further diversification can be achieved by investing in different mutual funds that in turn invest in different stocks and bonds.
To invest in mutual funds you have to go through an investment advisor who will in turn link you up with a fund manager. The investment advisor will work with you to define the investment goal and establish your risk tolerance. An appropriate fund or funds are then chosen accordingly. Usually the investor is required to make regular, in most cases monthly, payments to the fund manager for a period of at least 15 to 18 months and to maintain the investment for a minimum period. Both the amounts and periods are usually defined so that the investment is beneficial to both the investor and the fund manager.
Ugandan investors must insist to know if the investment advisor they are dealing with has been licensed to offer such services by the Capital Markets Authority. In the past unscrupulous people have pretended to be investment advisors and fleeced many unsuspecting individuals. And under no circumstance should an investment advisor act as a conduit for transferring your investment funds to a fund manager.
There are many possible reasons why one could consider investing in mutual funds. Two of the most common and applicable reasons in the Ugandan or even East African context are education and retirement planning. A parent with children in secondary school, primary school or even nursery school should be paying the current fees while casting an eye on the cost of college education. It can be a difficult if not impossible task to pay many children through University while drawing from salaries or business income. If the parent planned early and invested money in a mutual fund over a period of time the cost becomes more bearable not only because of the higher return but other factors including the power of compound interest and the relatively lower risk of mutual funds.
A similar reason to education planning also applies to retirement planning. Both individuals and institutions can use mutual funds or specific funds known as pension funds to invest funds for retirement. The benefit afforded by this investment include use of more stable currency, and ability to invest for a longer time frame and also that the fund has known track record. Some funds have been operating for over 100 years.
As it is always said in the world of investment, past performance is not an accurate indicator of future performance. So even if a fund made an average return of 40% in the past 5 years that might not be the case for the next 5 years. It is also always advisable to talk to a financial advisor before committing funds to an investment.
Note
This article has been written to provide general information and education and should not be taken as an investment advice. Readers are strongly encouraged to seek professional advice before undertaking, postponing or cancelling any investments.
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