Categories: Investing JSE

A guide for South Africans on how a Mutual Fund work?

What is a mutual fund?

A mutual fund is a collective investment that pulls together the money of a large number of investors, to purchase a variety of securities like stocks or bonds. When you purchase a share in a mutual fund, you have a small stake of all investments included in that fund.

Think of a mutual fund as a basket of investments. When you purchase a share in a this fund, you are buying one share of this basket, and therefore have a stake in one small fraction of all the investments in that fund.

How do mutual funds work in South Africa?

Mutual funds can potentially benefit investors in several ways. They are a way to make a diversified investment. Most are managed by financial professionals. And because of the wide variety of mutual funds, they allow investors to participate in a wide variety of investment types.

Let’s walk through an example of how this fund works. Suppose there is an investor who wants to invest some of his retirement portfolios in the Johannesburg Stock Exchange, but he doesn’t have time to analyze individual stocks and create a diversified stock portfolio.

Instead, he decides that he’d rather purchase a mutual fund. This way the investor can purchase a single investment, which will be similar to purchasing an entire portfolio of stocks. But which mutual fund is right for him?

To find the right one he uses online tools such as mutual fund searches and ratings given by independent third-party organizations like Rateweb, to find a fund of this kind that meets his investing goals.

Top Mutual Funds in South Africa

  • Old Mutual
  • Coronation Fund Managers
  • Ninety One Plc

Mutual Fund Prospectus

Once he finds a fund that looks like a good fit he reviews the fund’s prospectus, which is the official summary and explanation of how the fund operates. The prospectus provides a variety of information about the fund, including its fees and charges, minimum investment amounts, performance history, risks, and other useful information.

After researching the fund and its prospectus, our investor decides that this fund looks like a good investment. So he buys the minimum required investment amount, and purchases shares of the fund.

Mutual Fund risk factor

By owning shares, the investor now participates in the gains and losses of all companies held in the fund. A benefit of this is diversification, which is when an investment or portfolio is spread across several different investments.

Doing this can help lower risk. For example, if one company that the fund invests in has a rough year, the impact on the fund’s total assets can be small. Because that struggling company is only one fraction of the fund’s total assets.

Who manages the Mutual Fund?

A mutual fund is managed by a fund manager or managers who buy and sell the fund’s assets. Fund managers aim to provide the biggest returns they can for investors by using financial analysis and professional expertise.

While a talented manager could earn good returns for the investor’s fund, there is no guarantee of success. If a manager makes choices that don’t pay off, our investor won’t earn the returns he was hoping for.

Mutual Fund, fund manager fees

Even if the fund doesn’t perform well the manager still collects a fee, which is paid from fund assets, meaning even lower returns. Management fees aren’t the only cost our investor has to pay, either.

Besides transaction fees, the fund may have a sales load, which is a charge to either buy or sell shares. Some funds also charge an additional load if shares are sold within a specific time frame.

Now that the investor is bought into a fund how might he make money from it? One way is through appreciation, which is when the fund’s shares go up in value.

Typically, when the fund’s assets rise in value the fund shares do the same. Unlike a stock, the value of the fund shares does not change throughout the trading day. Instead, the fund’s value is calculated and updated when the market closes.

How do investors make money from a Mutual Fund?

Outside earning from the appreciating value of the Mutual Fund’s shares, another way an investor might make money through a mutual fund is from a dividend payment, which is when a mutual fund pays out a portion of its earnings to shareholders.

However, when the fund’s assets fall in value the fund shares do the same, which is a risk of owning a mutual fund. One benefit to mutual funds is the variety of mutual funds available.

Conclusion

Our investor chose a mutual fund that invested in stocks. However, there is a mutual fund for almost every type of investment. For example, equity funds buy stocks, fixed income funds buy bonds, and balanced funds buy both.

Some mutual funds may invest in a whole index, while some others focus on stocks of a certain country or market sector. Certain funds have different objectives as well. Some may look for riskier stocks in growing industries, while others will invest in more stable companies.

Sponsored

Start trading with R400+ bonus

Trade stocks, forex, commodities, metals and CFDs on stock indices with an internationally licensed and regulated broker. For all clients who open their first real account, XM offers a R400+ trading bonus without any initial deposit needed. Learn more about how you can trade over 1000 instruments on the XM MT4 and MT5 platforms from your PC and Mac, or from a variety of mobile devices.

Shephard Dube

Shephard Dube is the Co-Founder of Rateweb. He is a web software developer with a passion for personal finance, economics, stock market, blockchain and cryptocurrencies. He spends most of his time figuring out how organizations and governments can make the environment conducive for business owners and consumers.

Recent Posts

  • Money Advice
  • News

How much should you have in Savings?

April 20, 2021
  • Banking
  • Investing
  • Reviews

Discovery Bank Fixed Deposit Accounts Review 2021

April 20, 2021
  • Banking
  • Investing
  • News
  • Reviews

Sasfin Bank Fixed Deposit Accounts Review 2021

April 16, 2021
  • Banking
  • Investing
  • News
  • Reviews

Bidvest Bank Fixed Deposit Accounts Review 2021

April 16, 2021
  • Banking
  • Investing
  • News
  • Reviews

Capitec Bank Fixed Deposit Accounts Review 2021

April 11, 2021
  • Medical Insurance
  • News
  • Reviews

FedHealth Medical Scheme Review 2021

April 9, 2021

Search

Disclaimer

Rateweb strives to keep its information accurate and up to date. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. All financial products, shopping products and services are presented without warranty. When evaluating offers, please review the financial institution’s Terms and Conditions.

Rateweb is not a financial service provider and should in no way be seen as one. In compiling the articles for our website due caution was exercised in an attempt to gather information from reliable and accurate sources. The articles are of a general nature and do not purport to offer specialised and or personalised financial or investment advice. Neither the author, nor the publisher, will accept any responsibility for losses, omissions, errors, fortunes or misfortunes that may be suffered by any person that acts or refrains from acting as a result of these articles.

Contact Us

admin@rateweb.co.za| For all editorial and technical issues

sales@rateweb.co.za| If you want to advertise with us

We respond to all communication within 1 Day. Most of the times we respond within 20 minutes.

This website uses cookies. DISCLAIMER: Rateweb is not a financial service provider and should in no way be seen as one. In compiling the articles for our website due caution was exercised in an attempt to gather information from reliable and accurate sources. The articles are of a general nature and do not purport to offer specialised and or personalised financial or investment advice. Neither the author, nor the publisher, will accept any responsibility for losses, omissions, errors, fortunes or misfortunes that may be suffered by any person that acts or refrains from acting as a result of articles on this website.