The benefits of investment funds
An abundance of investment options and a proliferation of new asset classes has coincided with an expansion of the investment fund offering, particularly exchange-traded funds (ETFs), which have grown exponentially in popularity in the past 20 years. But what are the benefits of mutual funds? And why do investors prefer it over investing in individual assets?
“The 21st century began with less than $100 billion in ETF assets. Now, that number is $4.7 trillion, and the number of products continues to grow.” — BlackRock, May 2018.
The benefits of investment funds
1- Diversification
Diversification is the thing that saves your investments from risks. Most funds invest across a variety of assets in order to mitigate the downside risk of owning individual assets.
It is human nature to back winners, which means that investors are more likely to invest in assets that are already doing well without thinking that those assets may be close to peaking. A benefit of mutual funds is that they can provide investors with natural and automatic diversification by holding groups of assets independent of individual performance.
In other words, funds invest in dozens and in some cases hundreds of assets that are difficult for individual investors to obtain, giving you the balance you need to have a sound investment portfolio.
2- economies of scale
Firms undertaking the brokerage task often charge the same fixed commission for trading a single asset or multiple assets. This means that one of the benefits of mutual funds is that they can significantly reduce trading costs.
Funds also rebalance frequently which can lead to significant trading costs for individual investors trying to repeat fund asset allocation, not to mention that it would be extremely time consuming just like a full time job!
3- Professional management
Many people lack the skills, knowledge or time to invest properly. One of the benefits of mutual funds is that they give investors access to the risk management skills and oversight that a professional fund management team brings to the table.
While fund managers cannot guarantee better returns, the research and dedicated time they provide can certainly improve the due diligence and asset selection process.
4- Liquidity
Liquidity is basically the time it takes to convert an investment into cash, and is usually eroded by high volatility. This is because it is difficult for a trader to exit a position at the price they want as spreads widen in times of volatility.
Diversification allows you more liquidity as a basket of assets is less vulnerable to broad market fluctuations than individual assets. Most funds provide this liquidity through regular subscriptions or redemptions and in some cases by trading in the secondary market.
5.Rest
Purchasing a variety of investments can be a cumbersome and expensive process. However, one of the benefits of investment funds is that they provide a mechanism for owning a wide basket of investments without the need to acquire the underlying assets individually. Rebalancing and portfolio composition are managed by a professional team on behalf of the investor.
“Exponential developments in the investment management industry are setting ETFs on course to accumulate more assets over the next five years than the previous 25 years combined.” — BlackRock, May 2018
There are clearly a number of benefits to investing in funds, aside from the fact that their industry is growing by leaps and bounds, other benefits to them can include the ability to invest small, frequent amounts rather than having to wait to accumulate funds to purchase all of these assets on their own.
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