If you are an online trader in Singapore, investing in mutual funds can be one of the best business decisions you make today. While mutual funds may seem complicated for first-time investors, taking the time to understand how the trade works is a good start in your investment journey. Here is everything you need to know about investing in mutual funds as a newbie.
How mutual funds work
A mutual fund is created when an asset investment company like home.saxo pools together investments from individual investors and institutional investors who share the same investment objective. A fund manager will manage the pooled investment by investing it strategically in capital assets in an effort to generate the maximum returns for the people and institutions he invests on behalf of. The fund manager is usually someone with a professional background in finance, with an exceptional track record in the management of investments. They also need to show a deep knowledge and understanding of how the markets work. The online trading platform charges expense ratio, which acts as the annual maintenance fee for managing investment for individuals and institutions.
As an investor, you make money from regular interest/dividends and capital gains. You can choose to reinvest the profits from the trade through a growth option or to earn a steady income through a divided option.
Types of mutual funds
There are thousands of mutual funds to invest in, making the selection process confusing for newbie investors.
Generally, mutual funds fall in one of six categories:
- Stock funds ( invest in stocks)
- Bond funds (invest in bonds and sources of fixed income)
- Asset allocation funds (invests in stocks and bonds)
- Money market funds (invest in liquid, short term bonds)
- Commodity funds ( invest in commodity companies like mining and energy companies)
- Alternative funds (invests in alternative assets)
Active and passive mutual funds
Actively managed funds are run by a portfolio manager who chooses which investment to sell or buy with the goal of outperforming the market. While some fund managers achieve their goal in a short period, it has become increasingly difficult for investors to regularly beat the market. Actively managed mutual funds are more expensive due to the human aspect involved.
Passive investment in mutual funds is slowly gaining popularity amongst Singapore traders. This is mostly to the ease of the investment process and the results it delivers. The goal of passively managed funds is to match the market benchmark and not to outperform it. Because passive funds are not completely controlled by managers, the investment is cheaper and includes fewer fees.
Benefits of investing in mutual funds
Provision of instant diversification
One mutual fund can invest in hundreds or thousands of bonds and stocks, thus offering instant diversification to the investors. Instead of trying to build your diversified stocks and bonds portfolio, being part of a mutual fund gives you instant exposure to thousands of securities.
Low minimum investment requirements
Most mutual funds have minimum investment amounts. However, the amount is low when compared to what you would pay to invest privately. You can invest any amount between $1000 and $2500 as the minimum required investment. Some funds have lower minimums, while others waiver the minimums for investors buying shares through a retirement plan sponsored by the employer.
When you invest in mutual funds, you do not need to be an expert in this line of investing to make money. Once you register with an online trading platform in Singapore, your investment will be managed by a professional mutual funds manager. They will do all the work for you by picking the right securities to invest in and making day-to-day investment decisions. The extent to which your investment manager makes the investment decisions depends on whether the funds are passively or actively managed.
How mutual funds are taxed
Unlike exchange-traded funds, mutual funds are less tax-efficient since shares are bought and sold through fund managers. Because mutual funds distribute the profits amongst the shareholders, it can often attract an unexpected tax bill. Short-term capital gains attract the ordinary income rates on distribution, while long-term capital gains attract a lower capital gain tax rate.
Smriti Jain is the owner and senior content publisher at Financesmarti. Financesmarti is a website where she shares a lot of useful stuff for the people and business of India. This includes small business ideas and other banking information, as well. Smriti completed her education in science & technology from Delhi University. Smriti usually has interests in digital marketing now, and she has chosen this career for the full-time opportunity. The primary purpose of starting this blog to provide quality information on the banking industry to the people.