If you take a look at a global business scene, you may notice so many different funds that sprout like mushrooms after rain. Every time a new one is established I wonder who will invest it in that particular fund?
The fund can most easily be imagined as one large amount of money. This money is distributed in various securities: stocks, bonds, treasury bills, some money is in bank accounts, etc. Depending on where most of the money is invested, we have different types of funds: equity, mixed, bond, and money.
Who manages these significant sums of money? They are managed by companies that are registered for that and which are officially called fund management companies. Such a company can establish several different funds. Thus, for example, the fictional company Super invest manages funds called Super global, Excellent bond, etc. but the names of the funds themselves are the least important. What matters is the prospectus or the statute of the fund in which it is written how much money will be invested where. Most people, “investors” never read it, and they should.
The fund’s prospectus does not say exactly which shares or bonds they will buy, but it says approximately how much money will be invested in the shares as much as in the bonds and in which countries. Eg. can write a maximum of 10% of the money will be invested in shares in some countries. This can mean zero dollars and can mean hundreds of thousands of dollars depending on the total amount of money in the fund.
Let’s look at a picture of a fund worth 2 million USD:
2 million divided into hundreds of different shares, bonds, etc. In order to now enable us, ordinary people, to invest our money in that fund, it is divided into shares that we can buy and sell.
When establishing a fund, the initial round amount of one unit is determined, eg $100. In our example, this would mean 20,000 shares x USD 100 = USD 2,000,000.00. You can easily imagine the shares if you imagine the whole fund as a cake, one share would be one slice of cake. Each slice of cake has all the ingredients in it only to a lesser extent. By buying 15 shares at the price of $100 or investing $1,500, we would also become the “owners” of all these shares and bonds, ie our money would be added to these USD 2 million and distributed in the same way.
In exchange for our money, we will receive a “Certificate of Purchase of Shares” and on that certificate, it will be written that we have purchased 15 shares. What actually happened? We have just increased the fund’s assets by $1,500 or 15 units. So now the fund has USD 2,001,500.00 divided into 20,015 shares.
Every time someone new invests their money in a fund their assets and number of shares increase. Of course, the reverse is also true. The sale of shares reduces the amount of money in the fund and the number of shares.
At the beginning or during the establishment of the fund, the price of one unit is determined, agreed, however, depending on the operations of the fund, the unit price changes. Our initial $100 can rise to $150, but it can also fall to $80. It all depends on the ability of the managers who run the fund.
The share price is calculated every day. Simply add up all the money the fund has, and the number of all the shares it owns is multiplied by the final price of the shares on that day, the same is done with other securities. In the end, the price of one share is calculated and it is made public.
After investing money in the fund, you will usually sit in front of the screen and watch the price of the fund every day. You will multiply this price by the number of shares you bought and thus calculate how much you have earned.
Why invest in mutual funds?
They are managed by educated managers who have the most sophisticated modern technology and methods for risk assessment, all possible information (and the impossible) and there are, if necessary, foreign advisers for investments abroad.
They would think, “great,” you can’t lose money. In addition, they divide the risk (expertly: disperse) into several different stocks and markets, and in the event that one or more stocks fail (read: the company goes bankrupt or achieves poor results), it is not so terrible if the value of other stocks has increased. They invest in the highest quality stocks (not any), they are easy to buy and sell. They are intended, as you have probably concluded, for “the masses of people”. Everyone. In fact, they are based on the assumption that you, the individual, will simply not be allowed to monitor the market every day, look at the financial statements of firms to see which is doing well and which is not, follow macroeconomic news, calculate risk, exposure, etc. – they will do a “boring job” for you, and you just enjoy making money. They are simply trying to convince us that they are smarter than us (most often they are) and that we leave our money or at least part of it to them. However:
When it comes to your HARD money, NO ONE is smarter than yourself.
You are the one who chooses and decides where the money will invest you and how much. The fact is that some mutual funds in America have really enriched many ordinary people like you or me who don’t get too caught up in finances, but it’s also a fact that some people have lost a good chunk of their money and instead of easy laziness in retirement had to re-enter employ. We don’t want the same thing to happen to you.
The thing is that the funds monitor the situation on the capital market, and the market is (un) predictable. It grows a little and then falls a little more, then it grows again, then comes the crisis, and then the upswing and so it is constantly changing. But when everything is added and subtracted in the end, it should still be a positive result – so at least the data from the past say.
Before you start investing – get educated. By no means do I recommend a method: buy and forget. It’s your money and you have to take care of it even when you leave the day-to-day management to someone else.