At Aberdeen International Fund Managers Limited, we believe it is important for investors to understand what they are investing in. As such, we have links listed below to answers for frequently asked questions, which may address your immediate queries.
- What is a mutual fund?
- What are the benefits?
- Who should invest in mutual funds?
- What are the risks involved?
- How do I spread risk?
- How do I choose a fund?
- What is the ideal timeframe for an investment?
- When should I buy?
- How do I know if a fund is expensive?
- How do I know my transaction price?
- How do I keep track of my fund?
- When should I sell?
- How do I sell?
A mutual fund is a type of 'pooled' investment vehicle. What this means is that an investor combines his money with other investors'; the total is then invested to buy a range of assets like shares or bonds. The investor owns shares whose value is based on the underlying assets. The fund is 'open-ended' to the extent that shares can be created or cancelled as investors subscribe more money (or redeem).
Economies of scale: Each investor can gain access to a much wider number of stocks via a mutual fund than if he had tried to buy them individually. Typically, a mutual fund consists of 30-100 stocks.
Cost: To buy all the shares in a typical mutual fund portfolio would be very expensive since dealing in small lots in individual shares is pricey. Equally, just to buy shares in a handful of companies would expose an investor to another level of risk entirely.
Diversification: The more companies the collective 'pool' is invested in, the less the performance of each one will affect the whole. So, one of the main fears of direct equity investment - that you risk losing all your money - is much diminished.
Access: Mutual funds can invest in areas that may be difficult to access as an individual, usually for reasons of size, liquidity or legislation. They also offer opportunities through such things as theme or sector funds (e.g. technology) to approach investing in new ways. Even for serious private investors, this is a huge advantage.
Professional Management: Mutual funds are run by professional fund managers. Some fund houses are attached to large organisations, like banks, while others are independent-such as Aberdeen. It is the manager's decision what stocks to choose for the portfolio, and when to buy and sell.
Convenience: Mutual funds offer convenience since you can buy and sell shares whenever you want. Prices are quoted on business days. Moreover, there are no requirements for a holding period (although anything below three years is generally not encouraged). Investors can also buy extra shares or sell down their holdings at any time.
Mutual funds are suitable for anyone interested in growing the value of their savings over the longer-term. This could include people who have neither the time nor the experience to manage their own portfolios, small investors seeking diversification and 'ordinary' investors who simply want to improve their long-term financial security.
As a general rule, the more risk you are prepared to take on and the longer you can put your money away, the higher the potential return. Funds have different levels of risk, reflecting such things as the type of underlying assets, the number of stocks held, market liquidity and the manager's overall investment style.
It is sensible to establish at the outset your investment goals (for example, aiming to save for retirement, buying a home, etc) and look for a fund with an investment objective that matches these needs and expectations.
Funds can go some way to spreading risk, by including investments in tens of stocks and covering different markets. However, if you want to diversify risk further, you may want to consider splitting an investment across several funds, including those investing in markets with low correlation to one another.
Mutual funds cover a broad spectrum of assets from low-risk money market funds, through to bonds and higher-risk equities. There are also capital guaranteed funds (which limit potential losses and must be held to the maturity date of the fund in order to enjoy the benefit of the guarantee but may have less upside as a result).
Mutual funds are generally long-term investments, and at least three to five years is usually recommended depending on the fund's investment objectives. Why? Because investment funds offer diversification of risk via a portfolio of stocks; as such, it will take time for the portfolio to produce a return.
For the same reason mutual funds are inefficient for short-term trading-you may want to invest directly in equities if you want to punt.
There is no 'right' time to buy. Too many investors imagine they can perfect investment timing - so they become preoccupied checking the fluctuations in daily prices before committing. This is folly. As professionals we don't do this because we know that markets discount expected news and there are, anyway, many irrational influences that can move markets.
If you feel comfortable with a fund's objectives and its long-term prospects, it's probably as good a time to buy as any.
Many investment newcomers make the assumption that a fund costing, say, US$20.00 a share is more expensive than a new one at US$10.00 a share. This is incorrect. The higher price of the first fund reflects the fact that its underlying assets are worth more as a division of the total outstanding shares. What really matters are the assets held within the mutual fund portfolio.
There is no reason to think that a fund at US$10.00 has more upside when it is investing in the same market and similar underlying assets.
The share price you pay will be based on the closing prices for the day that the original copy of your completed application form is received. Shares are priced on a forward basis-meaning that you will not know the exact price at which you are transacting at the point of time you make your investment.
These prices will be published in the newspapers (and posted on this web site) about two business days after the transaction date, but will be calculated based on the closing market prices of the day of your transactions.
Once invested, you will receive a contract note detailing your number of holdings and transaction price. You can keep track thereafter by looking in the main newspapers as well as on this web site. Valuations usually appear in newspapers two business days later-so, for example, a Monday price will be published on Wednesday.
Our practice is to issue a statement of holdings to shareholders half yearly.
Once invested, the hardest part is to know when to take profits or cut losses. Markets are proverbially a pull between greed and fear, and it is these emotions that can impel investors to hang on to paper gains too long or sell too quickly.
If you're thinking of selling, ask yourself simply if you have given an investment enough time to perform, whether you have reached your objectives and how the underlying fund / market prospects appear.
Send your redemption instruction to your broker, sale intermediary ('agent') or Aberdeen International Fund Managers Limited if you do not have broker or agent.
The proceeds will be mailed to you by cheque or sent to your bank account by telegraphic transfer within five working days from the date of processing or receipt of the original redemption instruction, whichever is later.
Warning Statement: Subscriptions may only be made on the basis of the relevant prospectus and most recent annual financial statements and semi-annual financial statements if published thereafter. Investor should read the prospectus and financial statements for further details. The price of shares and the income from them may fall as well as rise and an investor may not realise his original investment, particularly in the early years. Past performance is not necessary a guide to future performance.