Mutual funds are collective investment schemes that pool assets from different investors to invest in a portfolio of stocks, bonds or other securities to meet specific investment objectives. The portfolio is managed by portfolio managers, supported by a team of investment professionals including analysts.

There are different types of mutual funds and their investment objectives vary. Some could aim to provide regular income by investing in bonds, dividend stocks and cash, whilst some could aim to achieve capital growth in the long term by investing in growth assets such as equities.

As mutual funds are generally considered medium to long-term investments, investors are advised to seek financial advice when investing for time so as to gain the benefits of long-term investing.

You can invest in a mutual fund by buying units of a collective investment scheme. The price of each unit is determined on each dealing day of the fund according to the value of the fund's investments at the close of the previous day. The number of units you will receive depends on the amount of your investment less the fees and charges you have to pay.

Flexible solutions

You can select a fund or a combination of funds that match with your investment goals and risk profile. For example, an investor nearing retirement and have low risk tolerance might consider bond funds or balanced funds which generally tend to exhibit lower volatility compared to equity funds.
 

Diversification

Mutual funds allow you to build a diversified portfolio with a relatively affordable investment amount. For example, the minimum investment requirement of a fund is generally lower than that of purchasing specific stocks and bonds directly.

And as mutual funds invest in a portfolio of securities which could cover more than one asset class, this could help better manage investment risks as the poor performance of a particular holding in a fund portfolio is less likely to have a major impact on the fund portfolio as a whole, versus if an investor invests in just that particular security.
 

Broader investment choices

Mutual funds help you invest in markets that could be difficult for individual investors to access directly. Some assets such as bonds have high investment entry level which might not be feasible to some individual investors. With mutual funds, you can conveniently gain exposure to different markets around the globe.
 

Professional management

Mutual funds are managed by professional fund managers. They make decisions based on research and analytical tools that non-professional investors may not have access to.

Fees and charges

As you invest in mutual funds, you generally have to pay various fees. There are fees that are one-off and mainly paid to the distributors of the fund. For example, initial charge is paid when units are purchased while redemption charge is incurred as you sell or redeem units of the fund. There are also recurrent fees such as management fees which are paid to the investment manager for managing the fund.
 

Risks

Investment involves risks. While investing in mutual funds helps to diversify some of your risks, it does not eliminate all risks entirely. Before you invest, please review your investment goals, risk profile and the offering documents of mutual funds, and consult a financial advisor.

You can buy and sell your units in a mutual fund on any dealing day of the fund. The redemption proceeds will typically be paid within five dealing days.

Mutual funds differ in terms of investment objectives, strategies, risks and costs. Your choice of funds is subject to your risk profile, investment objectives and investment horizon.

Consult a professional investment adviser to help you set up a portfolio of funds that matches with your risk profile and investment objectives. Generally, funds can be broadly categorised as follows:
 

Money Market Funds

• Low risk
  
  
• Returns may not always outpace inflation
  
  
• Typically used as short term investments
  
  
• Provides liquidity
  
  

Bond Funds

• Low to moderate risk depending on type of bond
  
  
• Potentially greater returns than money market funds, aim to exceed inflation
  
  
• Focus on generating regular income opportunities and portfolio diversification
  
  

Equity Funds

• Moderate to high risk
  
  
• Long-term returns usually exceed inflation
  
  
• Potentially greater returns than bonds
  
  

Multi-asset Funds

• Risk and return levels generally lie between those of a bond fund and an equity fund, depending on the allocation between bonds and equities
  
  
• Helps manage the risks that come with investing in a single asset class
  
  
• Broadens the sources of income and growth from a diversified pool of asset classes
  
  

Note: Different asset classes may have different risk profiles.

Mutual funds enable ordinary investors to employ the same risk management strategies that are normally only available to institutional or professional investors:
 

Asset allocation

Different types of assets move in different ways and mutual funds allow you to spread your money around all of them. Higher-rating bonds, for example, might do well when stock markets are falling. By allocating your portfolio to stocks, bonds and cash, you can reduce risk and enjoy the levels of growth potential in the long term.
 

Diversification

Unlike direct ownership of a few stocks, an equity fund invests in many different stocks and in a lot of cases many different markets. This means that a price drop in one holding or market is unlikely to hurt as much as it would as compared to a portfolio that consists of only a fewer holdings stocks.

When you select a fund house, you could consider the following criteria:

• Well-established presence with a good reputation
  
  
• Extensive global investment resources
  
  
• Performance with track record
  
  
• Strong client focus, with a wide range of products and services to meet your needs