Putting a coin aside for that rainy day is a financial teaching that has been with us for ages. Indeed, this practice has proven useful for many of us as it not only helps in growing wealth but is also one way of cushioning us from unforeseen unfortunate events in the future. Stocks, land, government and corporate bonds and mutual funds are just but a few of the options available for an individual looking to save and make some profit on their principal.
The choice of investment tool is largely determined by the risk appetite of the potential investor. The general rule is that high risk investments (such as stocks) have a potential to create higher returns while low risk tools (such as government bonds) offer lower returns. A mutual fund (also called a unit trust) is considered a low risk, low return investment. The idea here is to pool resources from various investors and to invest them in areas that would ordinarily bear significant barriers to entry for potential investors with relatively small amounts of money.
Unit trusts are usually run by fund managers. The managers have experience in finance and investment and can analyze the market and make investment decisions on behalf of their clients in a manner that offers the least risk and the highest return. The client thus utilizes the expertise of the manager and is also free to engage in other activities.
There are many different products that exist under unit trusts. For example, some comprise investments made in only government paper. Others may be in stocks while other products are a mix of various products tailored to meet the risk appetite of the client.
To join a mutual fund, one first needs to study the market for a product that meets their needs. The next step is to make an application which entails filling in a form either electronically or manually. The amount of money to be invested, the duration for which it will be invested and the exact product is specified at this point. Appending a signature on the application form seals the contract.
The total fund is divided into units (hence the name) and each unit is allocated a price. Each investor or unit holder will be allocated a number of units that is proportional to the amount of money invested. The returns are based on each unit; the greater the number of units one has, the higher is their return. Expenses charged include management fees and government taxes where applicable.
There are a number of advantages that will be realized by an individual that invests in a unit trust. On of them is that the pooling of funds will enable them invest in markets they would not have accessed as individuals. There is also a potential for higher returns since fund managers have greater bargaining power thanks to the larger sums of money at their disposal.
For any investment, liquidity is a major concern. A good investment is one that can easily be converted to cash or another asset within a short period of time. Liquidating unit trusts is as simple as banking a check. This means that you will have your money within a couple of days upon making a request for the same.