A Complete Guide On How To Invest in Mutual Funds

While there is a wide range of investment methods, undoubtedly, one of the most famous investment tools among them is mutual funds. Those who are interested in stepping into the world of investment can learn everything about how to invest in mutual funds here. 

How To Invest in Mutual Funds: Learn The A-B-C’s! 

Learn About 2 Basic Terms To Invest in Mutual Funds: 

What is a Mutual Fund?

A mutual fund is an investment vehicle created with money from different money pools. Investors who want to invest their savings in various money and capital market instruments form these pools of money. 

Investors get participation shares expressed as a part of the portfolio owned by the fund, which becomes a partner in a fund by purchasing. In other words, the profit or loss from the invested instruments is divided equally among all investors by their shares.

Mutual funds are run by professional managers, who use the fund’s resources to invest in capital market instruments such as stocks, government and private sector debt instruments, gold and other precious metals, and foreign securities. The goal of these seasoned professionals is to direct the fund in line with predetermined goals and make a profit. Fund managers use some sharply defined methods to do this.

Mutual funds, which are seen as an easy and attractive way for investors of all types to access financial instruments managed by professionals, are among the favorite investment tools for investors. Because mutual funds enable investors to create a diversified portfolio with a small amount of money, they can also be a good choice for investors who are new to the investment world as they are easily accessible.

What is Participation Share?

Participation share is an indicator of how many shares the investor shares in the fund portfolio. Shares in mutual funds are similar to stocks. For example, how an investor becomes a partner in a company by purchasing stocks and has rights on that company, similarly, he becomes a partner in the fund portfolio with a participation share in mutual funds.

Unit share prices are calculated continuously by the fund founder on working days, and this current price is used in the buying and selling of participation shares. These prices are announced at the addresses where the shares are bought and sold every working day.

Participation share unit share prices are calculated in several stages. First, the prices formed in the exchanges where the assets in the fund portfolio are traded, that is, where they are bought and sold, are taken into account and the portfolio value of the fund is calculated. Then, the receivables are added to the portfolio value of the fund and the liabilities are deducted. Thus, the total value of the fund is reached. Finally, the unit contribution price is determined by dividing the total fund value by the number of shares.

How to Invest in Mutual Funds?

Learning how to invest in mutual funds, buying or selling these funds is extremely easy. As we mentioned earlier, mutual funds have shares that are similar to stocks. You can invest in the funds that are suitable for you by purchasing these participation shares in pieces or in the amount of money you have determined in an investment account. 

Fund participation shares can be purchased directly from the fund’s own establishment, investment companies, or banks. Anyone who wishes can easily give fund buying and selling instructions from their bank’s phone, internet branch, or ATM, or from the investment companies they work with.

Mutual fund participation shares can be bought and sold at certain times during the day. If you decide to sell your shares, you will receive your money within a few days. But before investing in any fund, it is useful to evaluate the prices and conditions well. Thus, you can save on extra costs such as commissions.

What Do Mutual Funds Earn An Investor?

Now let’s get to the earnings part. There are basically three ways to profit from mutual funds:

  • Capital gains from sales of securities
  • Dividends and interest income
  • Mutual fund performance

Capital Gains

Most mutual funds’ profitability comes from trading in securities. If the price of a security in the fund’s portfolio rises, the fund manager may consider making a profit by selling that security. Such investment strategies provide huge profit opportunities that can be distributed to fund clients.

Dividend and Interest Income

Mutual funds include securities such as stocks and bonds in their portfolio. The fund earns profit share (dividend) or interest income from these securities. You will receive a share of these incomes as much as your participation share.

Mutual Fund Performances 

The share price of a successfully managed fund will inevitably increase. For example, if the price of a security in the fund portfolio rises and this security is not sold by the management, the price of participation shares will increase. You can also make a profit by selling your participation shares at a higher price than you bought them.

Types of Mutual Funds:

Experts classify mutual funds according to their characteristics and the instruments they invest in. So, what are these classes, what types and which mutual funds can be invested in?

Here are the most common mutual fund types and examples you should know and invest in. 

Equity Funds

Equity Funds are mutual funds that have at least 80 percent of domestic or foreign companies’ stocks in their portfolio. Funds that hold company shares in the BIST 100 Index (domestic) or, for example, certain global technology company shares (foreign) in their portfolio, are examples of stock funds.

Debt Instruments Funds Funds

that include at least 80 percent domestic or foreign public-private sector debt instruments in their portfolios. At the same time, these funds can also perform reverse repos.

Money Market Funds

Funds investing in highly liquid assets with the longest maturity of the debt instruments in the Fund portfolio, with an average daily maturity not exceeding 45 days.

Precious Metals Funds

They are mutual funds that can contain a maximum of 80 percent precious metals such as gold, precious metal certificates or almost any money and capital market instrument based on precious metals. They are also commonly known and expressed as gold funds.

Mixed Funds

Mixed Funds are funds that hold a maximum of two debt instruments, stocks, lease certificates, gold, and precious metals, each at a rate of at least 20 percent, in their portfolio. 80 percent of these funds consist of at least two asset classes that we have mentioned.

Variable Funds Funds

Variable Funds Funds are those funds that do not fall into any of the other mutual fund categories due to legislation and portfolio limitations. In these funds, fund managers can perform more active portfolio management than the markets.

Index Funds

At least 80 percent of the fund portfolio consists of assets within the scope of an index authorized by the Capital Markets Board (CMB), all of the assets or a portion selected by sampling. 

Fund Basket Funds

Fund Basket Funds have a portfolio consisting of at least 80 percent participation shares of mutual funds or exchange traded funds traded in the stock market. 

Prior to choosing the funds to invest in, you need to determine your strategy and goals correctly. After determining your investment goals and general strategies, you will of course be able to find a fund that will fit them.

What Is The Cost of Mutual Funds?

The advantages of learning how to invest in mutual funds are not free. If you are considering adding mutual funds to your portfolio, there are two basic types of expenses to consider. The first of these is the fund management fee and expense ratios. The second is trading commissions.

The Fund Management Fee and Expense Ratios 

The fund you are investing in will charge you each year under the name of a management fee. You pay this fee for the management of the fund. Fund management fees are usually around 1%-3% (often called the expense ratio). In most cases, the fund management fee is charged annually. If collected monthly, the annual rate is calculated by distributing the monthly rates.

Trading Commissions

Commissions are fees paid for capital market transactions carried out in the investor’s portfolio. In other words, you pay these fees when you trade. Although commission fees are not mandatory, it is the fund’s discretion whether to apply these fees.

Both the fund management fee and whether the fund receives commissions from trading transactions are clearly stated in the fund’s bylaws and prospectuses. You can calculate all the expenses out of your pocket by looking at the bylaws and prospectus of the fund you want to invest.

There are many funds in the same fund types that have similar or exactly the same assets in their portfolio. By comparing these funds, you can find the most suitable fund for you in terms of cost and performance. You should keep in mind that when comparing funds, you need to consider not only expense but also other factors such as performance.

Advantages and Disadvantages:

The pros and cons of being able to invest in mutual funds help players decide whether mutual funds are suitable investment tools for you.

Advantages

  • Diversity
  • Less Costs
  • Professional Management
  • Low Minimums
  • Flexibility and Convenience

Diversity

The diversity they offer is Perhaps the most attractive aspect of mutual funds to investors. 

Mutual funds are inherently diverse; The risk of loss is distributed to various securities such as stocks, treasury bills and government bonds in which the fund invests. Fund managers try to minimize the risk of loss by investing in different securities in different sectors. If you want to both earn capital gains and have a well-diversified portfolio, mutual funds may be the perfect fit for you.

If you try to diversify your portfolio yourself by investing in different investment tools, it can be a bit expensive. Mutual funds offer you the chance to do this at much lower costs. Thus, it is possible to invest in special shares belonging to different sectors, bonds of different distributors and other investment instruments with less capital.

Less Cost

If you try to build the portfolio, you get a well-diversified portfolio at very low fees through a mutual fund. Comparison analysis: To invest in stocks of 10 different companies, you have to pay 10 times the transaction fee. With mutual funds, you can invest in any company you want to invest in by paying a transaction fee. 

Professional Management

Mutual funds are managed by professional names which is another advantage that mutual funds provide to investors. 

Mutual funds are one of the easiest and cheapest ways to entrust your portfolio in the hands of a professional. Fund managers research the market in depth, analyze and conduct back-to-back tests in order to make the best investments.

Players can also benefit from all these advanced services for small amounts through mutual funds. For this very reason, mutual funds are excellent investment tools for “rookie” investors who are just entering the world of investment.

Low Minimums

For those players who do not want to invest huge sums, Mutual funds are an exceptionally good choice for small investors. 

There are funds that allow you to invest even with really low numbers such as 10 TL. For this reason, mutual funds appeal to a wide audience.

Flexibility and Convenience

Since there are many different types of mutual funds, they are suitable investment tools for every investor. 

Each fund manager has his or her own strategy; some invest in value, some invest in growth, while others invest in especially developed markets or markets that are still new.

Investors can invest in funds that have a manager in line with their views. Mutual funds are instruments that are easy to understand, but also offer high liquidity and significant diversification opportunities. You can easily benefit from these advantages of mutual funds. In addition, mutual funds can be converted into cash very quickly and easily.

Disadvantages

  • Risk
  • Expenses

Risk

Despite being managed by professionals, mutual funds can also make investments that will bring losses. Like all investment instruments, every mutual fund whether bonds or stocks, carries the risk of losing value in the securities in its portfolio.

Costs 

As we know mutual funds are managed and they come at a cost for management. 

Even if the fund’s performance is poor, you have an obligation to pay transaction and operating fees. Therefore, it will be important for your economic health to find an investment fund with expenses that will not strain your pocket.

Final Verdict and Things To Consider:

Mutual funds are universal investment instruments that appeal to investors from all backgrounds. It is important to have well-defined goals and strategies before researching the mutual funds that are best for you. Once you define your goals and strategies well, you can find a mutual fund that is transparent about its history and has high current performance and you can enjoy making big profits with low expenses.

Risk Level

Keep in mind that when you decide to invest in mutual funds, you are also taking a risk.

Because the values ​​of the securities that the fund holds or buys in its portfolio may increase or decrease. In such a case, you may lose a portion of the principal you invested. However, the risk of every mutual fund is not at the same level. This level of risk is different for each fund, and in this context, mutual funds can be divided into less risky or more risky.

The most basic measure that you can use to make this risk level distinction is the risk level shown in the investor information form of the funds. Mutual funds with a high level of risk are more likely to lose, and if the market goes well, these funds can also provide higher gains compared to others. In other words, potentially high returns often mean high risk. Therefore, when choosing between funds with different risk levels, you should consider your risk tolerance and make your choices accordingly.

Past Performances

Prior to investing in a mutual fund, the performance of the fund should be evaluated. Its performance for at least 3 or 5 years should also be evaluated if possible.

However, you should not forget that there is no certainty that the return obtained by a mutual fund in the past period will also be obtained in the future. For this reason, we recommend that you look at the past performance of the fund to get an idea.

On the other hand, as different investment themes may come to the fore in parallel with the conjuncture in the markets, focusing on expectations instead of focusing on the past will be a much better approach for your investment goals.

Expense Ratios

A fund’s expense ratios can have a negative effect on the return. However, this does not mean that a fund with a higher expense ratio will earn a worse return. You need to know that the expense ratios of funds can change for different reasons. For example, a fund may choose to trade for longer maturities after creating its portfolio. Unlike other funds, it may prefer to profit from short-term price movements by trading more frequently.

Before choosing to invest in mutual funds, keep in mind: 

  • The portfolio manager who manages the fund, 
  • the portfolio composition and strategy of the fund, 
  • the performance of the other funds of the Fund founder in the previous periods and their success, 
  • the management fee rate of the Fund,
  • the total expense ratio of the places where Fund participation shares can be bought and sold, 
  • trading conditions and trading hours

You need to learn these points above and have sufficient knowledge about them to learn how to invest in mutual funds. 

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