Mutual funds are investment arrangements that pool funds from various investors. This pool of funds is then invested in a mix of carefully selected instruments.
For example, a mutual fund can invest your money in a basket of stocks. Before investing with a mutual fund, pay attention to what the fund invests in.
You invest in a mutual fund by purchasing units of the fund. Think of it as owning houses in an estate. Just as house owners earn through rents, units also earn returns.
These returns come in two forms: periodic distribution and capital gains.
With periodic distribution, if the annual rate is 10%, for instance, you'll earn a daily breakdown of that on each unit you own. This can then be distributed on quarterly, bi-annual or annual basis. This applies majorly to mutual funds that invest in money market instruments like treasury bills. Such funds are generally low-risk
On the other hand, capital gains happen with changes in unit prices. For example, if you buy a unit at ₦1,000 and it changes to ₦1,100 within a year, it has gained 10%. This applies more to funds that invest in bonds and stocks. They are categorised as medium and high-risk funds.
Yes, mutual funds are safe to invest in as they are regulated. The Securities and Exchange Commission (SEC), which is the regulatory body for investments, oversees their operations.
In essence, they are legitimate investment channels. However, they are categorized according to the instruments they invest in. Examples of these instruments are treasury bills, stocks and bonds.
Also, a fund can be categorized low-risk, medium-risk or high-risk, depending on what they invest in. On Cowrywise, you get to a take a risk assessment that matches you with funds in line with your risk tolerance.