Decoding Mutual funds

Mutual funds are managed by expert fund managers that look after an individual’s fund and suggest the best investment options based on market situations to maximize returns. Furthermore, mutual funds are quite flexible, accessible and versatile that makes them potentially strong investment tools for creating and accumulating wealth.

If you looking for an investment vehicle to park your extra earnings, this article will decode mutual funds so that you can extract maximum benefit out of your investment vehicle.

What are Mutual Funds?

As the name suggests, mutual funds in UAE are mutual pools of funds that are formed by contributions from several investors with a common motive of multiplying and growing their savings. The amount collected is later invested as per the investment aim of the fund.

Mutual funds can also be defined as investment securities that allow investors to allocate their money into a professionally assisted investment. Funds gathered from mutual contribution can be invested in bonds, ETFs, stocks, shares, gold and other market-related tools to reap returns.

Investing in mutual funds is probably the simplest way to grow your savings. Moreover, assistance from expert fund managers makes it highly reliable investment vehicles available not just in the UAE but all across the globe.

Mutual funds are categorized into different categories based on the form of investment-

Equity Funds

Equity funds are the most common mutual fund that invests only in equity-based instruments and stocks.

Debt Funds

Debt funds are a mutual fund that invests only in steady income based instruments.

Money Market Funds

Money-market funds are another type of investment vehicle that typically invests for short-periods in money market-based instruments.

Hybrid Funds

Hybrid funds invest equally in both equity and debt-related instruments which help to maintain a balance and mitigate potential market risks.

How to Set-up a Mutual Fund

Setting up a mutual fund in UAE requires trustees, sponsors, custodian, and an asset management company. While setting up mutual funds the trust is substantiated by a sponsor who serves as a promoter as well. Typically mutual funds are held for the benefit of shareholders.

The asset management company appoints expert fund managers that have expertise in investments. Fund managers collect and efficiently manage the funds gathered from multiple investors. The asset management company (AMC) has several schemes out of which investors can choose the best-suited scheme based on their objective of investment.

Benefits of Mutual Fund Investments

Mutual funds in UAE have several advantages which are mentioned below.

Simple to Manage

Nuances of finance are complex to understand for common people. Investors parking their savings in the stock market are equipped with extensive knowledge of investments in their returns and the various risks associated with it.

Diversity

Diversity in terms of financial investments refers to investing in different tools that have an inverse relationship with each other. Mutual funds in the UAE are an excellent investment choice to diversify an investor’s financial portfolio. Unlike the stocks, purchasing a single mutual fund adds diversification to the investment portfolio and helps people to build a corpus for spending their twilight years with peace of mind.

Versatile in Nature

Mutual funds allow investors to gain access to different sectors of the market based on their long and short term investment goals and appetite for handling risks. Different types of mutual funds are meant for targeting different sectors of the market to reap maximum returns from the initial investment.

Accessibility

Unlike the traditional investment vehicles that require huge capital for initiating investments, mutual funds allow investors to invest with as little as AED 100. Easy access and low initial investment cost make mutual funds one of the most user-friendly investment vehicles.

SIP approach

SIP or systematic investment plan approach is meant for investors who haven’t managed to accumulate a lump sum. As the name suggests under the SIP approach investors can invest small amounts periodically which are invested by a fund manager in different market tools to reap returns. The best part about the SIP approach is that it allows investors from all segments to invest small fragments of their earnings.

Liquidity

Mutual fund investments offer high levels of liquidity. In terms of finance, liquidity refers to the ease with which a particular asset can be converted into cash or assets similar to cash. Higher the ease of conversion higher will be the liquidity of an asset. Gold is considered highly liquid because gold can be sold easily without hassle for cash. Similarly, mutual funds are quite easy to liquidate and investors can redeem their investment at any time.

Risks involved with Mutual Funds

All investment tools like mutual funds, stocks, bonds, ETFs are subject to market risks. The nature of the market, in general, is dynamic and unstable which increases the probability of fluctuation in the rate of returns followed by loss of initial capital. The effect of market swings on mutual fund investments can be understood by an exemplary situation.

Suppose, You have invested AED 100 for 10 years and end up with AED 95 due to market swings. In a real-time scenario, it is very unlikely that investment for 10 years offers negative returns, however, it is possible. Considering the current market trend and pattern this investment would have received a return of 7 to 10 % approximately.

An important thing to be kept in mind is that short term mutual fund investments are more prone to decline in value when compared to long term investments.

How to Invest in Mutual Funds?

With digitization making its way in almost every corner of the globe, investing in mutual funds has become much easier. Investors can visit the nearest branch of the mutual fund house and complete the application process by filling a form and mentioning all the required details. Financial experts always suggest investors to thoroughly go through the documentation to clear all doubts.

Mutual funds agents are sales experts who visit potential customers and inform them about the latest investment scheme and its benefits. Mutual fund investments can be chosen based on income, goals and risk tolerance. Agents help investors in completing the application process and charge a commission fee in return to the service offered.

Online trading of mutual funds is gaining popularity because it saves time and reduces human effort. The major benefit of buying mutual funds in UAE online is that it allows investors to compare different funds and choose the best-suited plan.

Conclusion

If you are rookie in the world of financial investments mutual funds are the best choice for you. Mutual funds in UAE offer expert assistance and helps individuals to accomplish their long term and short term goals in life.

If your initial investment amount is less than AED 3000 then it is recommended you should start by one fund and gradually increase the number of funds to increase returns.