What is a mutual fund? Clarify 4 important things to understand before opening an account

Understand Mutual Funds More Clearly

(Mutual Fund) is not as mysterious as you might think. It is a financial mechanism that allows small investors to pool their money together to create a larger investment fund. The pooled money is then managed by a fund manager, who is a certified expert approved by the Securities and Exchange Commission, to operate according to the fund’s policy.

Once the fund manager invests and earns returns, these are averaged and redistributed to each investor based on their share of the investment. Combining small amounts into a large fund and having professionals manage it is what makes mutual funds a highly advantageous investment tool.

4 Benefits You Should Know About Mutual Funds

1. Diversification Reduces Risk More Than You Think

Individual investors often have limited funds, making it difficult to invest across various asset classes. Some require large sums or overseas deposits. But by pooling money with others, the investment size increases, allowing fund managers to diversify investments across multiple asset types more easily, thus reducing risk.

2. Experts Manage Your Money

Investing alone requires research, selecting products, and checking prices, which can be exhausting. With mutual funds, the fund manager, who must be registered with the stock exchange, handles these tasks. Plus, their work is monitored, ensuring your money is in trustworthy hands.

3. Continuous Portfolio Oversight

It’s not just leaving your money idle. There is ongoing oversight from the Securities and Exchange Commission, ensuring transparency, easy verification, and confidence that asset management aligns with policies.

4. Suitable for Various Types of People

Whether you are a beginner interested in investing, have limited funds, or are too busy to manage your portfolio, mutual funds are suitable for everyone. They make investing easier for busy lives.

How Many Types of Mutual Funds Are There?

In Thailand, many asset management companies offer various funds. For example, mutual funds can be broadly divided into 2 main types:

Based on the Trading and Redemption of Units

Closed-End Fund (Closed – End Fund)

Issued with a fixed number of units during the fundraising period, with a set closing date. During this time, units are not redeemed. To sell, investors must buy or sell units themselves. The advantage is that the fund is not exposed to the risk of continuous withdrawals, making management easier.

Open-End Fund (Opened – End Fund)

Can issue and redeem units at any time. The number of units can increase or decrease according to investor demand. This flexibility allows investors to buy and sell for cash at any time without waiting. The challenge for fund managers is maintaining liquidity.

Based on Investment Policy

1. Money Market Fund (Money Market Fund)

Invests in deposits and short-term debt instruments (with remaining maturity not exceeding 1 year). Returns mainly come from interest. It has the lowest risk, minimal volatility, suitable for risk-averse investors or for temporary cash storage.

2. Fixed Income Fund (Fixed Income Fund)

Invests in various debt instruments such as government bonds, state enterprise bonds, bank deposits, and corporate bonds. Offers higher returns than money market funds but with slightly increased risk. Still low, used for diversification.

3. Mixed Fund (Mixed Fund)

Invests in both debt and equity instruments, with equity allocation not exceeding 80%. Provides higher returns than debt funds but with increased risk. Suitable for moderate to high-risk takers or beginners learning about stock investing.

4. Flexible Fund (Flexible Fund)

Invests in both debt and equity without fixed proportions. The manager can adjust the allocation from 0% to 100% based on market conditions—adding stocks when the market is rising, increasing bonds when it contracts. Suitable for those with moderate to high risk tolerance who want active management.

5. Equity Fund (Equity Fund)

Invests primarily in stocks, with at least 80% in equities. Offers high returns but with high risk, fluctuating with market conditions. Ideal for those wanting to focus on stocks but lacking time to manage their portfolios.

6. Sector Fund (Sector Fund)

Invests over 80% in stocks within a specific industry, such as banking, communications, or transportation. Returns can be more volatile than the overall market because the risk is concentrated in one sector. Suitable for high-risk investors who can predict industry growth.

7. Alternative Investment Fund (Alternative Investment Fund)

Invests in commodities like gold, oil, or agricultural products. Highly volatile and risky. Suitable for high-risk investors seeking diversification through alternative assets without opening additional accounts.

What to Prepare Before Opening a Mutual Fund Account?

Once you decide to invest in mutual funds, the next steps are simpler than you think. The process is similar to other types of investments.

1. Know Your Risk Tolerance

This can be difficult to answer, but all asset management companies require you to complete a KYC test, which helps you understand yourself better. Think about how much fluctuation in your portfolio makes you comfortable. The percentage you can tolerate is your risk level. Keep this in mind to compare with the volatility of different funds.

2. Keep an Eye on the Economic Environment

The overall economic situation helps you choose suitable assets for the time. For example, if the market is expected to recover, you might invest more in stocks. If concerned, focus on debt instruments. Understanding economic conditions helps you select appropriate funds.

3. Read the Fund’s Prospectus

After narrowing down your choices, study the policy, trading conditions, liquidity, and dividend payout. This helps you understand how each fund operates and what benefits it can provide.

4. Check Past Performance

Choose funds with good returns, low volatility, and appropriate risk diversification. Remember, past performance does not guarantee future results, but it is a useful reference.

5. Continuously Monitor and Evaluate

Markets and economies change, so you may need to switch funds occasionally. Keep track of fund performance and economic conditions regularly.

How Are Fund Returns Calculated?

After purchasing units, many wonder how to know if they made a profit or loss. Since open-end funds are traded only once a day, (calculated based on the asset prices at the end of the day). Expecting returns requires patience over time.

The value of your investment, whether it grows or shrinks, is called NAV (Net Asset Value). It is calculated from the total assets held by the fund at the end of the day minus liabilities and expenses. If NAV is higher than your purchase price, you have a profit; if lower, a loss. But profit or loss is not final until you sell all your units.

This profit or loss is called Capital Gain, a normal return of the fund. Additionally, some funds distribute Dividends (Dividend), paid periodically without requiring you to sell units.

To determine total returns, combine both parts (if the fund offers both).

In Conclusion

No one is born an expert. Everyone has limitations—whether in knowledge, experience, time, or initial capital. But these limitations should no longer be obstacles because mutual funds help ordinary investors access investment opportunities more easily.

And one thing to remember—not investing is itself a risk. Your money will gradually lose value due to inflation if left idle. Mutual funds help your money work for you, and starting is very simple. The only thing left is to take action.