This is a guide on how to invest in mutual funds in South Africa. Mutual funds are a great way to earn passive income and save up from retirement. They are one of the safest investments you can make and don’t have a high barrier to entry.
What are mutual funds?
A mutual fund is an investment that pools money from many investors and use that money to purchase securities. These securities are usually stocks, bonds and other investment assets. A mutual fund is usually managed by a professional portfolio manager, the manager makes the decision on what to invest.
A mutual fund invests in different equities or asset classes, this makes the fund to be very diversified and safe. People use mutual funds because of their safety net. These funds usually have more than 100 securities on their portfolio, this protects investors from volatile securities.
Let’s say for example, you buy a stock in Standard Bank, then it happens that shortly after buying the stock; the company performs badly and the value of the stock goes down. You would have incurred a significant loss, mutual funds protect you against this by investing in multiple securities, something you would find hard to do by yourself.
Mutual funds are especially good for novice investors, you might not know what metrics to use when you are evaluating a particular stock of a company. Which might lead you to picking some very bad stocks and losing a lot of money, it’s also going to be hard for you to diversify if you don’t have a lot of money.
Diversification
As stated above, mutual funds are diverse. However, some mutual funds focus on investing on certain categories. Mutual funds can be classified into different categories; balanced funds, equity funds, index funds, specialty funds and money market funds.
- Equity funds – these are mutual funds that are completely focused on investing in different equities. These funds invest in stocks.
- Index funds – Index funds are very safe and track the value of the top best performing companies. With an index fund you get to invest in the top performing companies.
These might be 500 companies in total, this is very safe and highly recommended. You don’t need to be part of a mutual fund in order to invest in index funds. This is something that you can do completely on your own.
- Specialty funds – These are funds that specializing in a certain region or sector. The fund may only invest in African companies, emerging markets or women owned companies. Some funds invest primarily in tobacco and alcohol companies.
- Balance funds – These funds are balanced and invest in a mixture of equities and fixed income securities. Balanced funds usually have a formular for spreading out risk.
How do you earn money?
Mutual funds are both an investment and a company, investing in a mutual fund is similar to buying shares in a company. You get paid from dividends; these dividends are distributed proportionally.
The number of times investors receive their dividends is different for each mutual fund. Some mutual funds pay out dividends quarterly, some twice per year. A mutual fund has to issue dividends at least once per year.
How much do mutual funds cost?
The price of a mutual fund is determined by its Net Asset Value. NAV is the total value of the mutual fund’s asset minus its liabilities. Buying and selling of mutual funds happen at this price.
Mutual funds have a high liquidity and can be sold at the current Net Asset Value. There are other fees that investors pay mutual funds, these fees are annual operating fees, which might charge 1% of the funds under management. You also get charges when buying or selling shares.
Where to buy mutual funds in South Africa?
There are a lot of top tier South African companies that offer mutual funds. Some of them are Allan Gray, Investec, Old Mutual and Absa Money Market Fund.
Mutual funds are extremely attractive as a retirement option because you can hold them for a really long time. You can be able to invest in a mutual fund for over 30 years and just collect dividends.
Conclusion
This was a guide on how to invest in mutual funds in South Africa. Do you have any thoughts or questions? Comment below.
