Understanding Mutual Funds

Mutual funds are investment methods that allow traders in Singapore to combine their funds with other investors. They can then use the money to buy several bonds, stocks, and other assets that individual investors would have difficulties creating. This collection is known as a portfolio. 

The mutual fund rate (net asset value) depends on the value of the securities in the portfolio divided by the amount of the fund’s outstanding shares. This price changes depending on the value of assets the portfolio holds at the end of every business day. Remember, mutual fund investors in Singapore do not possess the assets in which the capital invests. They only own the shares in the capital itself. 

How do Mutual Funds Work?

A mutual fund is both a company and an investment. While this dual nature may seem strange, it does not differ from how an AAPL shares represents APPle Inc. when an investor in Singapore purchases Apple stock, for example, he is purchasing part of the company’s ownership and its assets. 

In the same way, a mutual investor in Singapore will be buying a part of the mutual fund company’s ownership, and its assets. The difference here would be that a mutual fund company specializes in making investments while Apple deals with manufacturing gadgets. 

Investors usually earn returns from a mutual fund in the following ways.

  • From interest on bonds they hold in the fund’s portfolio and dividends on stocks. A fund pays almost all the income it collects annually to the fund owners as a distribution. Often, funds give investors a choice to either reinvest their earnings and receive some shares or receive a distribution check. 
  • If the price of fund holdings increases but the fund manager does not sell them, the shares of the fund prices increase. Investors in Singapore can then sell their mutual fund shares for a profit.
  • If the fund trades assets whose price has increased, the fund gets a capital gain. Many funds will discharge these gains to Singapore investors in a distribution. 

If a mutual fund is defined as a virtual company, its director becomes the fund manager or the investment adviser. A board of directors hires the fund manager, and he (fund manager) is legally bound to work according to the mutual fund interests of the shareholders. Many fund managers are also part of the fund. 

A mutual fund company does not have many employees. The fund adviser can hire some financial analysts to either perform market research or choose investments. A fund accountant is responsible for calculating the fund’s NAV (net asset value). The NAV is the daily portfolio’s value that determines if share prices reduce or increase. 

Mutual funds should have one or two compliance officers and an attorney to handle government regulations. Many mutual funds form part of a larger investment company. Some companies have numerous separate mutual funds. 

Types of Mutual Funds

There are various categories of mutual funds illustrating the types of securities they target for their portfolios and the returns they seek. There is a fund for almost every investment approach or investor in Singapore. Other popular types of mutual funds include sector funds, market funds, alternative funds, target-date funds, smart-beta funds, and funds of funds. Here are some groups of mutual funds you should know. 

Fixed-income Funds

A fixed income mutual fund attracts investments that discharge a fixed rate of return, like corporate bonds and government bonds. In this case, the fund portfolio creates interest income and passes the same benefit to the shareholders. 

Often, these funds are managed actively, and strive to purchase undervalued bonds and dispose of them at a profit. These mutual funds can pay more returns than certificates of money market and deposit investments. 

Other Mutual Fund Groups include:

  • Index funds
  • Money market funds
  • Balanced funds, and 
  • Income funds

Bottom Line

Mutual funds give investors in Singapore an opportunity to invest in a varied portfolio of investments. Before venturing into mutual fund investments, you should understand their core features. As we have seen, there are various types of mutual funds. Knowing your goals and how a particular fund matches them helps you maximize your returns.