A mutual fund is a type of investment product made up of funds collected or pooled from many investors for the purpose of investing in securities such as bonds, stocks and alternative assets. They are mainly managed by professionals and allow small investors to own a diversified portfolio of investments. Here in Ghana, there exist several mutual funds on sale to the public. However, very few people understand what makes up these mutual funds and their risk exposures.
What this article will do is to explain to the public the types of mutual funds available, what securities these mutual funds hold and the risk associated with all of them. It will also help you measure mutual funds’ performance appropriately.
In Ghana, there exist three main types of mutual funds which are
- Equity Mutual Fund,
- Balance Funds,
- Money Market Fund
Each one of these categories has its own characteristics but today we will focus on equity mutual funds.
Equity mutual funds place their funds into equities or stocks and are therefore exposed to stock market fluctuations. So when you buy an equity mutual fund like EPACK or SAS Fortune Fund, then you’re indirectly purchasing stocks, using a professional fund manager. If the stock market goes down, your investment will also go down and vice versa.
The right way of measure the performance of an equity mutual fund is to compare it to the overall stock market performance. So if an equity mutual fund returns 20% against a stock market return of 25% then the manager is not doing a good job and vice versa. Always understand that you can compare mutual funds in the same category. Meaning you can’t compare Equity mutual funds to Balance funds or Money market funds because they all invest in different thing.