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Before you invest, learn how mutual funds work
Before you invest, learn how mutual funds work

Before you invest, learn how mutual funds work

Mutual funds are one of the investment instruments that are increasingly popular in the community because of a number of advantages. However, do you know how mutual funds work in generating profits?

Mutual Funds at a Glance

Mutual funds are investment instruments that function as a forum to collect funds from a number of investors (investors) which will be managed by investment managers (MI) for further investment in the form of a securities portfolio.

A securities portfolio is a collection of financial assets in the form of securities such as stocks, money market instruments, time deposits, Bank Indonesia Certificates (SBI), bonds, cash, and also includes mutual funds.

Thus, it can be concluded that mutual funds cover three things, namely:

  • Relying on mutual funds belonging to investors
  • The collected funds are invested in a portfolio of securities
  • Investment funds are entrusted to be managed by investment managers, from calculating risk to managing investment funds.

 

Mutual funds are in great demand because they have the advantage of being an investment alternative for novice investors with small capital who usually don’t have much time, a high risk profile, or the expertise to calculate the risk of the investment being carried out. In addition, the report on mutual fund assets is also transparent and the level of liquidity is maintained.

 

The presence of mutual fund investment instruments aims to increase the role of local investors who want to invest, but only have limited time and knowledge, to participate in the Indonesian capital market.

Types of Mutual Funds

In general, there are four types of mutual funds that are commonly seen in their investment portfolios. Here are the details:

1. Fixed income funds

Fixed income mutual funds are a type of mutual fund that aims to generate stable returns. The allocation of investment funds for this type of mutual fund is mostly placed in securities that provide fixed income, such as debt securities and bonds, then the remaining funds are invested in the money market. The way it works is similar to money market mutual funds, but with relatively greater risk. However, when compared to deposits the risk is still relatively small.

2. Money market funds

Money market mutual funds are mutual funds that allocate their funds to money market instruments and debt securities, such as deposits and securities, for a period of under one year. The goal is to maintain liquidity and maintain capital.

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Judging from the way they work, money market mutual funds are among the least risky types and even have almost no risk compared to other types of mutual funds, and are still more profitable than deposits. However,   the resulting return is also not as large as other types of mutual funds.

3. Equity funds

Equity mutual funds are a type of mutual fund where most of the funds are invested in stocks in the form of equity securities. Equity funds are riskier than fixed income funds and money market funds, but are still lower than direct stock investments. Even so,  the return  from equity mutual funds is relatively higher than other mutual funds.

4. Mixed mutual funds ( discretionary funds )

As the name implies, mixed mutual funds allocate investment funds into several sectors, namely equity securities and debt securities. Simply put, the placement of a mixed mutual fund investment is by combining stocks and bonds. 

The goal is to transfer the risk of loss while making a double profit. The risk is still lower than stock mutual funds, but higher than fixed income funds.

How Mutual Funds Work

The benefits of mutual funds basically rest on the role of the investment manager in managing the funds raised from investors. Simply put, investors only need to pour funds to the investment manager and enjoy the results of the  returns  obtained. To better understand how mutual funds work, here are 5 steps:

1. Register and open an account

To run mutual funds, investors can invest  offline  or  online . Offline mutual funds   can be done at securities companies providing mutual funds, while  online  can be done  through mutual fund selling agents or applications that provide reliable and trusted investment services. 

Next, investors will be asked to register by filling out a form in the form of personal data and completing other personal files. After that, investors will be asked to create a customer fund account.

 

 2. Choose the type of mutual fund according to the purpose

Usually, you will be given some information in the form of a prospectus and  fund fact sheet  before buying a mutual fund so that you can choose a product that suits your investment goals. From this information, you can ensure the performance of mutual fund products that are fit for purpose, and choose the right investment manager profile to manage them.

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A little illustration, this type of fixed income mutual fund or mixed mutual fund is suitable for novice investors who want to invest in the medium term. If you are planning a short term investment with low risk, you can choose money market mutual funds. Then, for long-term investment assets, you should choose stock mutual funds that provide  optimal returns  with a duration of more than five years.

3. Start investing 

In purchasing mutual funds, you can adjust the amount of investment funds according to your financial capabilities. By making a purchase, the investor means entrusting his money to an investment manager who will manage the allocation of these funds. Investors can monitor investment funds as well as the performance of their investment products through an investment portfolio.

4. Funds managed

After the first transaction, the investment manager will place investment funds into various securities sectors according to the mutual fund instrument chosen by the investor. In addition to managing investor funds, investment managers are also tasked with monitoring portfolios and regularly reporting their reviews to investors. The way mutual funds work at this stage will show differences according to type.

In money market mutual funds, investment managers will allocate investment funds into securities with maturities of less than a year. Then, in the fixed income mutual fund instrument, the investment manager allocates at least 80 percent of the assets in the form of bonds or debt securities. Later, investors will receive dividends from a number of bond products.

In this type of equity mutual fund, the investment manager allocates a minimum of 80 percent of the assets in the form of an equity stock exchange. The remaining allocation of funds will go into money market investment instruments.

Finally, investment managers in mixed mutual funds will manage the majority of securities instruments in the form of bonds and stocks. For this investment, there are 1-79 percent of stocks and 1-79 percent of bonds or debt securities, as well as 0-20 percent of money market securities.

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5. Investors earn  returns

At this stage, investors only need to wait for the return given by the investment manager. Meanwhile, the Custodian Bank will take care of administration, as well as supervise and maintain mutual fund assets ( safe keeping ).

In addition to relying on the management role of investment managers, the way mutual funds work in making a profit is to diversify investments into various instruments because investment funds are not entirely allocated to one instrument.

Best Mutual Fund Recommendation 2022

Although the risk of mutual funds tends to be minimal, investors can still experience losses if there are fluctuations,  concurrent redemptions  , or the performance of the investment manager does not meet expectations. 

Therefore, it is very important to read and understand the prospectus and performance reports of mutual funds before buying. Especially by looking at the risks and  returns  of each type of mutual fund, determining the composition of the securities, as well as the fees charged.

Reflecting on this, here are some recommendations for the best mutual funds according to their type.

1. The Best Money Market Mutual Funds

  • Sucorinvest Sharia Market Money Fund
  • Sucorinvest Money Market Fund
  • Mutual Fund Mega Fund Cash

 

2. Best Fixed Income Mutual Funds

  • Syailendra Premium Fixed Income
  • Fixed Fund TRIM 2
  • Sucorinvest Stable Fund

 

3. Best Equity Funds

  • Sucorinvest Sharia Equity Fund
  • Sucorinvest Maxi Fund
  • Manulife Mainstay Stock
  • Eastspring Investments Value Discovery

 

4. Best Mixed Mutual Funds

  • Integrated Fund Schroder II
  • Syailendra Dynamic Investment Fund
  • Sucorinvest Smart Kids
  • Trimegah Balanced Absolute Strategy

 

So, do you understand better and get a complete picture of how mutual funds work?