Jamaicans are becoming more conscious of the need to make their money work for them. Gone are the days when most people were satisfied with the security of a bank account because it was all they knew. Whether they’re rich, of modest means, or barely making ends meet, people are looking for investment opportunities that can bring more profitable returns, and help them fulfill their financial dreams.

While the lure of high-yielding ‘alternative’ options still abounds, investors are warming to the concept of mutual funds as a viable method of investing. Many financial institutions have had to scramble to find products that could compete with the earning potential of the alternatives, and are now offering overseas-based mutual funds. These also offer the opportunity to save in foreign currencies such as Canadian and United States dollars.

A mutual fund is an investment vehicle that pools together the investors’ funds and uses the money to purchase assets such as stocks, bonds and money market instruments. The mutual fund company has specific objectives and restrictions that determine how the funds can be invested.

Recently, Scotiabank DBG Investments, which retails several mutual funds, held a seminar focusing on this investment option. Tom da Silva, senior manager of sales and marketing at Scotiabank in Canada, pointed out that many people were trying to invest, but were not getting enough returns to compensate for the effects of inflation and the depreciation of the Jamaican dollar. He revealed that international mutual funds could provide investors with an opportunity to grow and protect their wealth.

Benefits of Mutual Funds

Mutual funds can give investors several advantages, da Silva noted. One of the key benefits was that the fund company hired professional analysts and managers to make all the investment decisions. A mutual fund investor wouldn’t have to figure out which stocks to buy or sell, or which fixed income instruments to own, as the portfolio managers would take care of all those decisions.

Diversification of investments is another important benefit, da Silva pointed out, as mutual funds typically invest in several types of stocks and assets. This would allow the investor to reduce the risks of investing in a few stocks or only one type of asset. Mutual funds would also provide this diversified portfolio at a lower cost. If a single investor tried to buy all those assets individually, the cost would be prohibitive.

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The Scotiabank executive also explained that mutual funds gave investors increased liquidity, or easier access to get back their money. Unlike individual stocks or bonds, which could sometimes take a long time to be sold, investors could more readily cash out of the mutual fund as needed.

Disadvantages of Mutual Funds

While mutual funds do present an opportunity to invest regularly to earn higher returns, it is important to note that they have drawbacks too. Their returns are not guaranteed, and it is possible to lose all of your investment if the fund manager performs poorly. It is more difficult to project future profits when compared with interest-bearing investments. Mutual funds can only provide the results of their past performance, and they always state that these historic returns are no guarantee of future earnings.

One of the major disadvantages of most mutual funds is that they charge fees that can be deducted before you even earn a dollar. Mutual funds may charge transaction fees and loads which are taken out of your investment, or operating fees that are deducted from the fund’s value. It’s important for investors to be clear about the type of fees that are charged, as they can affect the value of your investment.

Here are some of the mutual fund fees that you should be aware of:

Purchase fee is charged when investors buy fund shares. It is paid into the fund to help defray some of the associated costs.
Redemption fee is charged when investors sell shares. It is also paid into the fund to help defray some of the costs of selling shares.
Management fee is paid out of the fund’s assets to the fund manager for investment advice and other administrative services.
Front-end load or sales charge is paid upfront to the brokers that market the fund to investors.
Back-end load or deferred sales charge is paid to brokers when investors sell or redeem shares. This amount can vary according to the length of time the investors held the shares, and it eventually decreases to zero after a specific period.
Exchange fee may be charged when investors transfer money from one fund to another within the same fund company.
Account fee can be charged for maintenance if an account falls below a specified dollar value.

When investing in mutual funds, you should always ask about the fees which are charged. Note that most financial institutions which offer international mutual funds managed by other companies will charge you a commission or load in addition to the regular management fees of the fund. Despite their disadvantages, mutual funds can help you to invest smartly to achieve your medium or long-term goals.