What is a mutual fund? Learn 4 key points before starting to invest

Get to Know Mutual Funds More Deeply

What is a mutual fund? This is the first question for every new investor. The answer is a (Mutual Fund), which is a mechanism that pools funds from many investors to be managed by licensed professionals authorized by the Securities and Exchange Commission. Once the funds are collected, the fund managers will invest according to the fund’s policy to generate the highest returns within an appropriate level of risk, then distribute profits to investors proportionally to their investments.

Why are mutual funds interesting? Because they solve several key problems for the general investor.

First advantage: Effective risk diversification When many people invest together, the capital increases, making it easier to purchase a variety of assets, including stocks, bonds, commodities, and even foreign assets that require large amounts of money. This reduces risk because it does not rely on a single asset class.

Second advantage: Professional management Fund managers have knowledge and experience, and must be registered with regulatory agencies. This ensures professional oversight and protection for investors.

Third advantage: Strict oversight The Securities and Exchange Commission continuously monitors funds, ensuring transparency and allowing investors to review their operations.

For these reasons, mutual funds are suitable for those with limited capital, no time to research, or even experienced investors who see this as a useful investment tool.

What types of mutual funds are there?

Mutual funds can be classified in various ways, but in Thailand, they are mainly divided into two dimensions.

Dimension 1: Trading ability

Closed-End Funds (Closed-End Fund) sell investment units only once at the start, with a fixed number of units throughout the project period, and have a definite redemption date. During this time, the asset management company (AMC) does not buy back units. If investors want to sell before maturity, they must find a buyer themselves. The positive side is that there are no inflows or outflows of money, allowing managers to focus more on fund management.

Open-End Funds (Open-End Fund) are the opposite of closed-end funds; they can be bought and sold at any time. The number of units and fund size change according to investor transactions. The advantage is that investors have liquidity, but the downside is that the fund must manage continuous inflows and outflows.

Dimension 2: Investment policy

Money Market Funds (Money Market Fund) invest in deposits and short-term debt instruments (not exceeding 1 year). Returns are low but risk is minimal, suitable for risk-averse investors.

Fixed Income Funds (Fixed Income Fund) invest in government bonds, state enterprise bonds, and other debt securities. Returns are slightly higher than money markets, with still low risk, suitable for diversification.

Mixed Funds (Mixed Fund) invest in both bonds and stocks, with stocks not exceeding 80% of the portfolio. Moderate returns and risk, suitable for beginners learning about stock investments.

Flexible Funds (Flexible Fund) have the freedom to adjust the proportion of bonds and stocks up to 100% based on market forecasts. Returns can be high, but so is risk. Suitable for those trusting the manager and willing to accept higher risk.

Equity Funds (Equity Fund) invest at least 80% in stocks. High returns but also high volatility. Investors must be able to handle price fluctuations.

Sector Funds (Sector Fund) invest in stocks within a single industry, such as banking, communications, transportation, with at least 80% of the portfolio. Returns and risks depend on the industry’s situation. Suitable for those with a positive outlook on a particular sector’s growth.

Alternative Investment Funds (Alternative Investment Fund) invest in commodities like gold, oil, agricultural products. Returns and risks are very high. Suitable for experienced investors seeking diversification into new asset classes.

Importantly: No fund is “the best” for everyone. Each individual must find the right mix that suits their situation at the right time.

What should you prepare before opening a fund account?

Investing in mutual funds requires a systematic approach.

Step 1: Assess your risk tolerance The key question is: How much change in your portfolio value makes you start to worry? This answer indicates your risk appetite. Generally, the AMC will ask clients to complete a KYC test to evaluate this.

Step 2: Get an overview of the economy In the current economic situation, which assets are worth investing in? Is the stock market doing well? Or are bonds more attractive at the moment? This assessment helps narrow down fund choices to match current conditions.

Step 3: Study the fund’s prospectus The prospectus contains all details: trading conditions, liquidity, payout methods, fees. It is the document for evaluation.

Step 4: Review past performance Check how well the fund has performed recently, its volatility, and whether diversification is appropriate. Remember, past performance does not guarantee future results.

Step 5: Monitor and evaluate continuously After investing, economic conditions may change, so ongoing monitoring and portfolio adjustment are necessary.

How do funds generate profits?

After purchasing units, investors wait. This section explains how profits or losses are calculated.

Since mutual funds can only be bought and sold once per day, (normally), the buy-sell price is based on the NAV (Net Asset Value), calculated from the total value of assets in the fund at the end of the day (Mark to Market), minus liabilities and expenses.

If the NAV is higher than the purchase price, the difference is profit; if lower, it’s a loss. However, gains or losses are not “realized” until units are sold.

Profit from buying and selling is called Capital Gain, a common return for funds.

Additionally, some funds distribute dividends (Dividend) periodically, without requiring investors to sell units. The total return includes both capital gains and dividends.

Summary

No one is an expert investor from the start. Everyone has limitations—whether in knowledge, experience, time, or initial capital—but these should not be obstacles because mutual funds are designed to address these issues.

Mutual funds are not complicated tools. Starting is easy; the rest is just action. When money is left idle, opportunities for growth are lost. Don’t let your money depreciate due to inaction. Mutual funds are simple tools—take action now.