What are mutual funds?

Mutual funds are professionally managed investment schemes that give individuals an easy access to global financial markets. The investment objectives and scope of different funds varies; some aim to provide steady returns by investing in bonds and cash, whilst others aim to achieve high capital growth by investing in stock markets or particular sectors, such as technology.

Why should I consider mutual funds?
  • Easy - You decide which funds to invest in and then professional managers take care of all the day-to-day decisions, so you don't have to watch the markets constantly.

  • Hassle-free - You do not have to spend time doing stock research or administration work, such as stock settlements and splits or foreign exchange, yourself.

  • Affordable - Start investing in global markets usually from a lump sum or through monthly investment plan.

  • Flexible - Tailor-make your own investment portfolio to suit your changing needs and circumstances with the wide range of funds on offer.

  • Good growth potential - With professional fund managers working for you to identify investment opportunities worldwide, you can diversify your investments and benefit from potential growth.

  • Risk reduction - Mutual funds generally invest in a wide range of securities, covering several different markets. This gives much more diversification than you can generally achieve on your own.

  • Liquidity - As you can buy and sell your funds at any time, you have full control of your investments and access to your money.

Do I lose control of my money in mutual funds?

Not at all. You're always in control. You decide which funds to invest in, depending on your investment objectives.

How do mutual funds work?

When you invest in a mutual fund, your money is pooled with that of many other investors. A professional fund manager then invests this pool of money in a wide range of securities. Mutual funds are divided into shares or 'units'. Those units belong to the investors in the fund. The number of units you are allocated depends on how much you invest. Unit prices are usually set each business day, according to the value of the fund's investments on the previous day.

What do mutual funds invest in?

Mutual funds can invest in all three types of financial assets - stocks, bonds and cash (money on deposit) all over the world. Some funds may also use other investment tools such as futures and options.

Can I get my money out quickly?

Mutual funds offer you liquidity and access to your money. You can buy and sell your fund investments on any dealing day (most business days). The redemption proceeds will normally be paid within 5-14 days after you sell.

How much do I need to invest?

One of the greatest advantages of mutual funds is their affordability. Usually you can start from a lump sum or through monthly investment plan.

How do I choose suitable mutual funds?

Your choice of funds should always be driven by your investment objective, risk tolerance and for how long. Setting a time frame is crucial because this will dictate your investment strategy.

Generally, funds can be broadly categorised as follows:

Different Investment Categories
Investment Characteristics
Money Market Funds
Low risk
Returns may not always outpace inflation
Place to park money pending future investment opportunities
Bond Funds
Low to moderate risk depending on type of bond
Greater return potential than money market funds
Provides good diversification for stock portfolios to help reduce risk
Equity Funds (stock market)
Moderate to high risk, can be volatile over short periods
Long term returns usually exceed inflation
For long-term growth potential. Money to be used after at least 3 years
How safe are mutual funds?

Returns from mutual funds are not guaranteed, since the value of units fluctuates according to the fund's investments. Seek professional advice to ensure that your investment portfolio suits your risk tolerance.

There are, however, legal controls to regulate mutual funds for the interest of investors. In Hong Kong, funds must be authorised by the Securities and Futures Commission (SFC) before they can be marketed to the public. Authorised funds must comply with the regulator’s requirements and have a proper structure, well-defined investment guidelines and restrictions, as well as accurate and sufficient disclosure. For example, every fund is required to appoint trustees to ensure that investors' funds cannot be misappropriated. Moreover, reputable fund houses employ rigorous internal controls and state-of-the-art technology to keep track of investors' accounts.

How can mutual funds reduce risk?

Mutual funds enable ordinary investors to employ the same risk-reduction strategies that are normally only available to very large investors:

Asset allocation - Different types of assets move in different ways and mutual funds allow you to spread your money around all of them. High quality bonds, for example, might do well when stock markets are falling. By allocating your portfolio to shares, bonds and cash you can reduce risk and aim to achieve the levels of growth potential you require.

Diversification - Unlike direct ownership of a few stocks, mutual funds invest in many different stocks and in a lot of cases many different markets. This means that a price drop in one stock or market will not hurt as much as it would if the portfolio consisted of only a few stocks from the same market. Remember, no single market is best (or worst).

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