A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
Does it mean less risk in the long run?
Investments in mutual funds require the appropriate time horizon. Having the right time horizon not only offers a better chance of obtaining expected and investment returns, but also reduces the risk in investing.
Now what are we talking about this “risk”? In simple terms, it is the volatility of investment results, as well as the possibilities of eroding investment capital. Staying invested over the long term, a few years of low/negative yields and a few years of impressive returns will make average returns quite reasonable. Thus, the investor can “mediate the widely fluctuating returns of each year” to achieve a more stable long-term return.
The recommended time horizon differs for each asset class and mutual fund category. Please consult an investment advisor and read the documents related to the scheme before making an investment decision.
