Mutual funds are a container and pattern of fund / capital management for a pool of investors to invest in the investment instruments available in the Market by buying mutual fund units. These funds are then managed by the Investment Manager into the investment portfolio, whether in the form of shares, bonds, money markets or securities / other securities.
From the definition above, there are four important elements in the definition of Mutual Funds are:
- Mutual funds are a collection of funds and owners (investors).
- Invested in the securities known as investment instruments.
- Mutual funds are managed by the investment manager.
- Mutual funds are medium and long term instruments
In mutual funds, investment management manages the funds it puts in the securities and realizes the gain or loss and receives the dividend or interest it deposits into the “Net Asset Value” (NAV) of the mutual fund.
The wealth of the mutual fund managed by the investment manager is required to be deposited with a custodian bank unaffiliated with the investment manager, where it is this custodian bank that will act as a collective custody and administrative office.
In investment theory, the diversification or dissemination (allocation) of such assets aims to reduce the level of risk is not systematic while still providing an optimal level of profit potential. Unfortunately, not all the savvy investors in sorting out what instruments should be collected to optimize the existing funds. The jam, diversification obviously requires substantial funds to buy preferred stock.
This is where mutual funds can play its role. Investors do not have to spend a lot of time analyzing what investment instruments deserve to be an investment portfolio because the investment manager will do it. With minimal funds, investors can also diversify through a pool of funds from other investors managed by investment managers.
Profit-Loss Mutual Funds
Unlike savings that have a certainty of return, investment has two different sides that will always exist that is risk (risk) and return (profit). Thus, no single investment instrument including a mutual fund can give a promise of profits because there is a risk that will remain attached.
This does not mean that investors should stay away from investment instruments such as mutual funds because behind the high risks there is also the opportunity to obtain a high level of high return (high risk high return). Although can not be eliminated, the risk can be reduced that one of them can be done by diversifying through investment instruments called mutual funds.
Excess Mutual Fund
In theory, diversification aims to optimize returns for a given level of risk. Mutual funds are the implementation of diversification because in mutual funds there is a portfolio of several different effects. Through the deployment of assets in several investment instruments (portfolios), mutual funds can optimize profits with certain levels of risk.
2. Professionally managed by investment managers
Customer fund managers are investment managers who understand well with the ins and outs of investment. With mutual funds, you can ‘leverage’ the knowledge and expertise they have to manage the money that has been painstakingly collected in order to get optimal results. You as an investor do not need to choose any securities that will be used as investment portfolio because it has become the task of investment managers.
3. Maximum capital yield maximum
Unlike investing in stocks or bonds directly requiring relatively large amounts of capital, mutual funds can be owned with little capital.
At any time you can sell (redemption) your mutual funds to the manager at the current NAV (Net Asset Value) price. Although the money from the sale is not immediately accepted at that time, but investors do not have to worry because the manager will definitely buy it.
5. Investment growth potential
Through the accumulation of funds from various parties, mutual funds have bidding power in obtaining higher returns, lower investment costs and access to difficult investment instruments if done individually.
1. Decrease in investment value
Who can beat the market? Although it is managed in a very professional way, the portfolio of choice of investment managers may not be able to provide profits due to the effects of purchased decreased prices. This can be seen from NAB (Net Asset Value) obtained at a time lower than NAV when buying (except money market funds).
2. Risk of economic and political change
Financial markets will not be separated from economic and political factors both in the global and local scope. Any event can have an impact on the price of securities in the capital market and money market. The Greek crisis in 2010 is an example of one of the events happening far away there can make the prices of stocks falling automatically make the value of investment, especially equity funds to shrink drastically.
3. Risk of regulatory change
Changes in applicable legislation or government policies may affect the return and investment returns that the investment manager will receive and may reduce the income that the holders of the investment units may have.
4. The risk of dissolution and liquidation
The holder of the investment unit has a risk that in the case of a mutual fund that fulfills one of the conditions as stipulated in Bapepam & Financial Institution, the Investment Manager will dissolve and liquidate.
5. Liquidity risk
The holders of the unit of interest shall be entitled to resell the unit of participation and the investment manager has an obligation to purchase it. However, if most or all of the unit holders simultaneously resell to the investment manager, the investment manager may not be able to provide immediate cash to pay for the redemption of that unit.