Mutual fund investment tips for beginners

Mutual funds have emerged as a popular and beneficial option for individuals seeking to grow their personal wealth. With their unique blend of diversification, professional management, and accessibility, mutual funds offer a compelling avenue for beginners to enter the exciting world of investing. Here are some tips to get you started:

Understand mutual funds: In Bangladesh, there are basically two types of mutual funds available in the market: open-end mutual funds and closed-end mutual funds.

Open-end mutual funds allow investors to buy and sell units at any time, and they continuously issue and redeem shares based on investor demand. On the other hand, closed-end mutual funds have a fixed number of units and are traded on the secondary market of stock exchanges.

Research the fund: Research the fund's performance history, investment strategy, management team and fees. This information can be found in the fund's prospectus, which is available on the fund company's website or through your broker's research team.

Diversify your portfolio: It is important to diversify your mutual fund portfolio by investing in funds with different investment objectives and asset classes. This can help reduce risk and increase returns. This diversification helps minimise risk and potentially increase returns by spreading investments across various holdings.

Choose suitable options: Mutual funds come in various types, catering to different investment goals, risk appetites, and time horizons. Investors can choose from equity funds, fixed-income funds, balanced funds, growth fund and shariah fund. This variety allows investors to align their investment choices with their specific financial objectives and preferences.

By investing in mutual funds, individuals can access a broader range of investments than they could afford individually, which further contributes to reducing the impact of any single investment's performance on their overall portfolio.

Mutual funds offer convenience and accessibility to individual investors. They typically have lower investment minimums, allowing individuals with smaller amounts of capital to participate.

Additionally, open-ended mutual funds provide ease of entry and exit, enabling investors to buy or sell fund shares at the fund's net asset value on any business day. Simultaneously, closed-ended mutual funds can be liquidated through the secondary market of the stock exchanges. This liquidity allows investors to access their investments relatively quickly.

Make the most of professional management: Mutual funds are managed by experienced fund managers who have expertise in analysing the local market and selecting suitable investments. This professional management can be particularly beneficial for individuals who may not have the time, knowledge, or resources to actively manage their own investments.

Avail tax benefits: Investing in mutual funds can provide tax benefits under certain conditions. For closed-ended mutual funds, a dividend income of up to Tk 50,000 is tax-free and for open-ended mutual funds, the limit is Tk 25,000 for a fiscal year.

Mutual funds have the potential to generate attractive returns over the long term. While past performance is not indicative of future results, investing in well-managed funds with a strong track record may provide opportunities for capital appreciation and income generation.

Mutual funds offer several advantages. However, they also have some drawbacks, such as fees and expenses, lack of control over individual investments, and market risks.

The author is the head of operations and compliance at UniCap Securities Limited.