Understanding Mutual Funds
Understanding Mutual Funds is a container used to raise funds from the Investor community to be invested in securities portfolio by the Investment Manager.
Illustration of Mutual Fund
Mutual Fund is a place or place of investment, where the funds collected from the community is capital rather than savings and inserted into the securities portfolio,
then managed by the investment manager and put the funds into the form of shares or Bond and then will be saved by the custodian bank.
Every investment must have advantages and risks as well as mutual funds.
The greater the profits derived from the investment, usually the higher the risk.
In accordance with the principle of high risk-high return. Similarly, mutual funds, as one means of investment, mutual funds also have the advantages and risks that need to be known by investors.
Mutual funds are considered as a basket that contains a wide range of shares owned by an investment manager.
The shares within it will differ from one mutual fund to another, depending on the recipe of each Investment manager.
The Investment Manager will sell their units of participation to the public,
By purchasing these units of participation, we entrust them to the management of the funds.
What is meant by the management of funds is the Investment Manager will conduct a sale and purchase transactions on the stock exchange resulting from their management will be reflected in the price of investment units commonly known as Net Asset Value (NAV)
In contrast to stock investing, this type of mutual fund investment is suitable to be managed for those of you who have limited time by investor strategy by using the right trading system.
From the definition above, it can be concluded that there are three important elements in the definition of Mutual Funds are:
- There is a collection of public funds, both individuals, and institutions
By collecting funds from its investors, investors who have minimal funds can participate in investments in the form of securities.
- joint investment in the form of a diversified portfolio of securities
Securities are securities, such as debt instruments, commercial securities, shares, bonds, debt certificates, investment units, collective investment contracts, futures contracts on Securities, and any derivative of Securities, either debt securities or are equity, such as options and warrants.
The securities portfolio managed by mutual funds can be a collection of several types of securities (not just kind).
- Investment Manager is trusted as a fund manager owned by the investor community
An investment manager is a party whose operations manage portfolio securities for its customers or manage a collective investment portfolio for a group of customers,
And excluding insurance companies, pension funds, and banks that conduct their own business activities under applicable laws and regulations.
The investment manager is responsible for managing the funds raised in mutual funds and is responsible for any investment activity, from investment analysis, decision-making, market monitoring, or taking action where necessary.
The investment manager is rewarded with services fee, performance fee, and entry/exit fee.
Mutual funds are 4 types if grouped by their portfolios .:
- Mutual funds Fixed income
Mutual funds with investments of at least 80% of managed funds (assets) in the form of debt securities.
- Stock Mutual Funds
Mutual funds with investments of at least 80% of their managed funds are invested in equity securities.
- Money Market Mutual Funds
Mutual funds whose investments are invested in debt securities with maturities of less than one year.
- Mixed Mutual Funds
Mutual funds that have a comparison of target asset allocation in stock securities and fixed income that can not be categorized into the other three mutual funds
In mutual funds, investment management manages the funds it puts in the securities and realizes the gain or loss and receives the dividend or interest it deposits into the “Net Asset Value” (NAV) of the fund.
NAV (Net Asset Value) is one of the benchmarks in monitoring the results of a Mutual Fund.
NAV per share/unit of participation in the fair price of the portfolio of a Mutual Fund after deducting operating costs and then divided by the number of shares/units of participation that have been circulated (owned by investors) at that time.
Mutual Funds Advantages And Disadvantages
mutual fund benefits are as follows:
Managed by Professional Management
Portfolio management of a mutual fund is carried out by an investment manager who does have expertise in fund management.
The role of the investment manager is very important considering that individual investors generally have limited time, so they can not conduct direct research in analyzing the price of securities and accessing information to the capital market.
Diversification or dissemination of investment embodied in the portfolio will reduce risk (but cannot eliminate)
because funds or wealth of mutual funds invested in various types of effects so that the risk was also scattered.
in other words, the risk is not as risky as one buying one or two stocks or individual effects.
Mutual funds are required to provide information on their portfolio development and its costs on an ongoing basis so that holders of investment units can monitor the mutual benefits, costs, and risks of mutual funds at any time.
managers of mutual funds must announce the daily net asset value (NAV) in newspapers and publish semiannual and annual financial statements and mutual funds prospectus regularly so that investors can monitor their investment progress regularly.
In order for a successful investment, every investment instrument must have a high level of liquidity.
Therefore, Financiers can redeem their units of participation at any time in accordance with the provisions made by each mutual fund so that, easier for investors to manage cash.
Open-end mutual funds are required to buy back their units of participation so they are very liquid.
Mutual funds are a collection of funds from many investors and then managed professionally, then in line with the large ability to make these investments will also generate transaction cost efficiency.
Because transaction costs will be lower than if individual investors conduct their own transactions on the stock exchange.
Wealth / Assets of Mutual Funds Safely Saved
The intended wealth is the customer funds of the investment Manager company that are kept securely in the custodian bank. The customer funds are different and separated from other assets.
In investing in mutual funds, there are various types of investment that can be selected for example growth funds, balanced funds, fixed income funds, money market funds, and others.
Investment Fund Risk
In addition to the benefits that can be given to investors in investing in Mutual Funds, there are some risks that can cause losses to investors.
Mutual Fund risks are as follows:
Risk of default is a risk that occurs when there are parties associated with Mutual Funds such as bonds, cannot pay or fail to pay interest and principal bonds to Mutual Funds which resulted in losses on Mutual Funds.
The point is that the funds allocated by Mutual Funds are decreasing, causing losses to the company, and causing less capital to invest so that the collected funds cannot be allocated to other types of investments.
One of the attractions of Mutual Funds is its high liquidity level, with investors being able to sell their shares at any time.
But behind the high liquidity of Mutual funds, there are also losses, especially if investors get negative information issues that resulted in investors have to sell their shares on a large scale.
Massive sales by investors resulted in Mutual Fund managers having to provide a lot of funding, as well as political problems that resulted in investors selling part or all of their shares, resulting in a lack of funds.
Risk of Change
Politics and Economy Basically, capital market investment in the form of money is very influential on political and economic changes.
Capital market investments such as Mutual Funds are also inseparable from the risk of political turmoil and declining economic levels, this will have a negative impact on assets of Mutual Fund.
So that raises doubts and confusion among investors in maintaining the asset, then the investor sells its shares to asset investment units or investment managers.
Market Risk and Globalization
The decline in market performance causes changes in market conditions that occur slowly or quickly both domestically and abroad.
Changes that occur in the country caused by the low number of investors and the state of the economy is less stable, so many investors who sell shares.
While the changes that occur overseas caused by the decline in stock prices and impact on capital markets in the country.
For that investors need to know the development of securities transactions that occur in the Indonesian capital market as well as capital markets in the world in the next few years in order to avoid the risks of market and globalization that may occur.
Risk Related Rules
The existence of strict regulations in managing Mutual Fund assets serves to protect the assets of investors from perpetrators who want to cheat, can hamper investment managers in managing assets of Mutual Funds.
This constraint is a limitation on the amount of investment by investors, so that the amount of funds managed is also limited, although in reality, some investors want to invest greater than the amount already set.
Risk of activities of Investment Fund Related Institutions
The parties involved in Mutual Funds such as investment maneuvers, custodian banks, Mutual Fund sales agents, in conducting their activities or making fraud will cause losses to the investors.
Therefore, investors also need to pay attention to the performance of Mutual Fund management to reduce the risk that will occur.