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The real wit behind mutual funds

 

In a previous article I tried to describe how the processes of the mutual funds work in general. As you may think, there is always more information to be required if you are willing to invest in such financial products. If you still haven’t made your mind, let me share some more tips about MFs.

  1. What you should know about the companies from the fund

I am not at liberty to share particular information from a mutual fund, but I’ll give you enough to figure it out by yourselves.

First, every sub-fund has a major sector or field of investment. Let’s take IT companies for example. There are several of those of you might be familiar, but you may not know that while some of these technological giants operate as competitors on the market, in the MF portfolio they might be next to one another. This means that two or more IT providers and manufacturers could be combined as part of one mutual fund. This is actually very smart, because this way if you buy shares through asset management companies you will be provided with the joined profit of a few high revenue holdings even if the last are in open competition with each other.

Second – some firms are more united than they look. Outside of the competition field there are companies who work in cooperation and have their backs covered if some shift in the market occurs. It’s not a 100% solution of their problems, but joined forces always stand a better chance if a crisis happens.

Third – financial institutions are always part of the sub-fund. Not a real surprise, but still an interesting fact. Banks, financial groups and subsidiaries of such are present in the portfolios and sometimes even consume a big part of the investment from the shareholders. This means that if you own shares in a MF, there is a big chance you are directly investing into some banks. You must be provided with a prospectus in which at least a few of those institutions will be mentioned and you will be able to track their development in future.

  1. Countries and capitalization

Every portfolio has also an exposition of the capital derivatives by countries. From this data you can quickly understand if you are investing in Canada or Malaysia, or both. Usually, there is one main country from which most of the companies operate and this could be mentioned in the name of the equity. If you spend enough time looking for information you will definitely find that every country mentioned in the portfolio has at least one firm central-based on its land.

Market capitalization is another part of the portfolio.

“Market cap is the market value of a publicly traded company’s outstanding shares. Market capitalization is equal to the share price multiplied by the number of shares outstanding.”

This quote is taken from the website Wikipedia.org: >> https://en.wikipedia.org/wiki/Market_capitalization

In mutual funds the companies are divided by three groups: small-cap – those with lower market value, mid-capwith semi-large value and those with big-cap which usually attract a big portion of the investment due to their longer term worth and less volatility on the stock market.

  1. Profile of the risk and profitability

It uses a simple numbers graphic (E.g. from 1 to 6) in which the higher the number – the hire the risk for the investor. Well, you should be aware of the fact that when you have 90% of the money invested in shares, this is more than risky but it is done so you can win more in less time. Furthermore, when the risk is bigger, the volatility of one share from the sub-fund is also high. This is why the asset management groups use formulas to calculate the indicator of risk based on the historical knowledge they have on the share in question. But even they do not rest assure that this indication is 100% verifying the potential future of the shares on the market. This means that even the smallest number illustrated in the portfolio still brings a potential risk for the investor.

Liquidity risk – if the shares from the MF become too shifty on the stock market their potential price could become difficult to evaluate. This will bring much tension if somebody decides to liquidize his investment at this moment and even result in big loses. At this point the asset management group will have a hard time selling these shares, since their price might be much smaller (and harder to calculate) than it used to be.

Operational risk – simply more risk for the involved parties, which could result in loses due to human errors, operational errors, glitches in the system or other external conditions.

Risk of the underdeveloped market – some countries might hold every kind of potential risk including political, economic, jurisdictional, etc. compared to other nations. This is why your financial partners choose wisely how developed is the country in which the companies enlisted in sub-fund is.

Written by: Lyubomir S. Evtimov

One thought on “The real wit behind mutual funds”

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