It is a very interesting time to be working in the financial sector. Everyone is talking about the lackluster stock market, foreign currency trading, and the list goes on … As a financial adviser, my objective is to strike the delicate balance between the importance of protecting my clients’ hard-earned money and generating superior returns for their portfolio. Some of the most common scenarios I encounter on a daily basis are:
“I want to grow my money but I don’t want to take any risk.”
“I am very new to investing and I don’t know where to get started.”
“I simply do not have the time to track my investments. Do you have something or someone to do this for me?”
“I have been a procrastinator for as far back as I can remember, and the problem is that I am very close to retirement, and have done very little to plan for it. Am I doomed, or is there something I can do right now?”
Upon hearing these concerns, I usually attempt to assure my clients that the past is just that – the past. Absolutely nothing can be done about it! But, as one popular televangelist, Paula White, often says, “You cannot conquer what you do not confront.” Once you have acknowledged your situation, the most crucial thing is to get started – RIGHT AWAY! Borrowing from another one of my favourite quotations, “Procrastination is the grave in which opportunity is buried.” The great news is that there is another investment option available to Jamaican investors, young and mature, sophisticated and unsophisticated: mutual funds.
What is a Mutual Fund? A mutual fund is a company that pools the money of many investors to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders, and each investor holds a pro-rata share of the portfolio – entitled to any profits when the securities are sold, but subject to any losses in value as well.
Why Mutual Funds? While mutual funds have been around since the 1920’s, their popularity has soared in the past twenty-five years. Naturally, some investors are curious to find out what exactly mutual funds can do for them. Essentially, there are several advantages:
1. Ease of Investment: Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation.
2. Diversification: Mutual funds bring diversification so that you can diversify your dollars over many different securities and currencies that may not be available or affordable to you otherwise.
3. Professional Management: Mutual funds provide the benefit of having someone else manage your investments and take care of record keeping for your account.
4. Convenience & Flexibility: You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services.
5. Quick, Personalized Service: Most funds now offer extensive websites with a host of shareholder services for immediate access to information about your fund account. A phone call puts you in touch with a trained investment specialist at a mutual fund company who can provide information you can use to make your own investment choices, assist you with buying and selling your fund shares, and answer questions about your account status.
What are some of the risks? Before you can begin to build a successful investment portfolio, you should understand the basic elements of mutual fund investing and how they can affect the potential value of your investments over the years.
When you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment than you put in to begin with – and that’s a scary prospect. Loss of value in your investment is what is considered a risk in investing. Even so, the opportunity for investment growth that is possible through investments in mutual funds far exceeds that concern for most investors. Consider why. At the cornerstone of investing is the basic principle that the greater the risk you take, the greater the potential reward. Or stated another way, you get what you pay for and you get paid a higher return only when you’re willing to accept more volatility.
Risk then, refers to the volatility – the up and down activity in the markets and individual issues that occur constantly over time. This volatility can be caused by a number of factors – interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock or bond we invest in will fall substantially. But it is this very volatility in stocks, bonds and their markets that is the exact reason that you can expect to earn a higher long-term return from these investments than you can from certificates of deposit and passbook savings accounts.
Different types of mutual funds have different levels of volatility or potential price change, and those with greater chance of losing value are also the funds that can produce the greater returns for you over time. So risk has two sides: it causes the value of your investments to fluctuate, but it is precisely the reason you can expect to earn higher returns.
You might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don’t pay enough to beat inflation over the long run. The important thing to remember when investing in mutual funds is to have a long-term view for the funds you invest in this type of investment. That way you can ignore or worry less about the short-term fluctuations.
What is the Prospectus? The prospectus describes the fund’s objectives, history, manager background and financial statements. In short, it is the document that makes investors aware of the risks of the investment.
How do you get started?
1. Contact the fund company directly by visiting its website or by calling them to request a prospectus and information kit for the fund or funds you are interested in. You’ll receive an application form with complete instructions on how to invest and redeem shares, as well as how to use other services offered by the fund company.
2. Read the prospectus carefully before you invest. It’s important that you understand how the fund operates and how its policies, fees or philosophies might affect your investment over time.
Happy investing!
From your friendly financial advisor
Investments | admin, 7 Feb 11 | 
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