Why invest in funds? 5 things new investors need to understand

Your Money is Losing Value

If you don’t withdraw and invest your money, it will depreciate right here. Due to inflation and market volatility, leaving your money sitting idle is a missed opportunity to increase asset value. This is the primary and most important reason why investors should start considering Mutual Funds.

Mutual Fund (Mutual Fund) is a collective investment of many investors with limited capital who want professionals to manage it. The great thing is, you don’t need in-depth knowledge or a lot of time to get started.

The Benefits of Investing in Mutual Funds

It’s not about the amount of money; you can invest as soon as you have money.

In the past, you needed a huge sum to invest in certain assets, such as foreign bonds or top-tier stocks. Today, when many investors pool their money, the total amount becomes large enough to manage more effectively. Fund managers, who must be registered with the stock exchange, can then diversify investments across various assets.

Diversification of risk, who oversees it?

You can invest in a portfolio with various asset types, reducing the chance of severe losses from investing in just one. Additionally, fund managers are certified professionals approved by regulatory agencies, so managing your investment portfolio is their responsibility, not yours.

Continuous oversight and control

The Securities and Exchange Commission plays a role in ensuring transparency through regular inspections, giving investors confidence that their money is in safe hands.

How Many Types of Mutual Funds Are There?

Mutual fund classification can be done in two ways: based on risk and liquidity, and based on investment policy.

1. Closed-End vs. Open-End Funds

Closed-End Funds (Closed-End Fund) are sold only once during the fundraising period, with a fixed number of units that remain unchanged afterward. The advantage is that fund managers don’t have to worry about selling units midway. The downside is, if you want to sell your money before the term ends, you need to find a buyer yourself.

Open-End Funds (Open-End Fund) can be sold at any time, meaning if you need cash, you can sell your units back to the fund daily. Very convenient, but the fund must always have cash ready.

2. Investment Policy-Based Mutual Funds

Money Market Funds (Money Market Fund) invest in deposits and short-term debt instruments, offering low returns and the lowest risk, suitable for those just looking to park their money.

Fixed Income Funds (Fixed Income Fund) invest in bonds, bills, and debentures, providing better returns but with increased risk.

Mixed Funds (Mixed Fund) invest in both equities and bonds according to set proportions, with moderate returns and risk.

Flexible Funds (Flexible Fund) are similar to mixed funds but without fixed proportions; managers can adjust the stock-to-bond ratio based on market conditions.

Equity Funds (Equity Fund) invest primarily in stocks (at least 80% of the portfolio), offering high returns but also high risk.

Sector Funds (Sector Fund) invest in stocks within a specific industry, such as banking, communications, or transportation. Returns can be very high, but risks are also substantial.

Alternative Investment Funds (Alternative Investment Fund) invest in commodities, gold, oil, agricultural products. These carry very high risk and are suitable only for risk-takers.

How to Choose a Fund Suitable for Yourself

Step 1: Know Yourself—Understand your risk tolerance

Questions to ask yourself: If your money drops by 10, 20, 30%, can you sleep well? Returning home to complete the KYC process at your securities company will help you find the answer.

Step 2: Look at the overall economy

Is the market rising or falling? What’s happening with inflation? Where are interest rates headed? These data will help you decide what type of fund to invest in.

Step 3: Read the prospectus

The prospectus details the fund: trading conditions, liquidity, payout methods. Make sure you understand it clearly.

Step 4: Review past performance

Past performance doesn’t predict the future, but it’s good to see: Which funds have delivered good returns? How volatile are they? How is risk diversified?

Step 5: Monitor continuously

Economic conditions change, investment policies must adapt, or even switch funds. Don’t be tied to your initial choice.

How Are Profits and Losses from Funds Calculated?

Once you buy units, the fund’s value is measured by NAV (Net Asset Value), calculated from the value of assets held by the fund at market close, minus liabilities and expenses.

If NAV is higher than the unit value you paid → you make a profit
If NAV is lower than the unit value you paid → you incur a loss

Profits or losses are not finalized until you sell your units. The difference is called Capital Gain.

Additionally, some funds regularly distribute Dividends (Dividend), which you receive without selling your units.

Summary

No one is born an investment expert. Everyone starts from zero. But with the tool of Mutual Funds, limitations on capital, knowledge, and time are no longer reasons to hold you back from starting.

The real risk is not investing at all because money working for you is more certain than working for others. Ignoring this and letting your money sit idle quietly erodes its value over time.

Funds help eliminate these problems. The rest is just about starting.