Mutual Funds: 4 Things Beginners Need to Know Before Investing

Understanding Mutual Funds Before Investing

(Mutual Fund) is a financial mechanism that pools funds from multiple investors and manages them by licensed and certified professionals approved by the Securities and Exchange Commission. The fund managers use this pooled capital to invest in various securities according to predetermined policies to generate returns for investors proportional to their investment share.

This mechanism offers tremendous benefits, especially for investors with limited initial capital, little time, or lack of expertise in managing investment portfolios.

4 Key Points to Know About Investing in Mutual Funds

1. Better Diversification of Risks

When funds from many investors are combined into a large amount, it enables efficient investment across a variety of assets. Foreign securities, high-investment assets, or special assets become more accessible through mutual funds, allowing retail investors to diversify their risks more comprehensively compared to investing on their own.

2. Managed by Professional Personnel

Fund managers must be certified by regulatory agencies. Profits, losses, and portfolio adjustments are handled by experienced professionals. Investors need not worry about their knowledge gaps because experts are there to assist.

3. Strict Monitoring and Control Systems

Every investment decision made by the mutual fund must undergo continuous review by the Securities and Exchange Commission. This ensures high standards of transparency and safety of funds. Investors can freely verify their investment status.

4. Suitable for Different Types of Investors

From beginners with no time or knowledge to those who prefer passive investment, mutual funds are flexible tools that can meet various needs.

Types of Mutual Funds

Based on Trading Characteristics

Closed-End Fund (Closed-End Fund)

• Sold only once during the initial offering
• Fixed number of units throughout the project
• Redemption period is predetermined
• To sell before maturity, investors must trade outside the system
• Pros: Reduces liquidity risk
• Cons: High liquidity risk for investors

Open-End Fund (Open-End Fund)

• Units are sold continuously
• Fund size and units can increase or decrease
• Investors can redeem units for cash at any time
• No closing date, except as specified in the prospectus
• Pros: Low liquidity risk for investors
• Cons: Increased liquidity risk for the fund

Based on Investment Policy

Money Market Fund (Money Market Fund)

• Invests in deposits and short-term debt securities (with maturities not exceeding 1 year)
• Lowest volatility returns
• Low risk level
• Suitable for risk-averse investors or for cash preservation

Fixed Income Fund (Fixed Income Fund)

• Invests in various debt securities such as government bonds, state enterprise bonds, certificates of deposit, corporate bonds
• Offers higher returns than money market funds
• Low to moderate risk
• Suitable for diversification alongside other assets

Mixed Fund (Mixed Fund)

• Invests in both debt and equity securities
• Equity portion not exceeding 80%
• Higher returns than fixed income funds
• Moderate risk
• Suitable for beginners starting in stocks or investors with moderate risk tolerance

Flexible Fund (Flexible Fund)

• Invests in both debt and equity securities without fixed proportion limits
• Managers can adjust equity holdings from 0% to 100% based on market forecasts
• Suitable for investors with moderate to high risk tolerance and no time to adjust portfolios

Equity Fund (Equity Fund)

• Invests primarily in stocks, with at least 80% in equities
• High returns but volatile according to market conditions
• High risk
• Suitable for investors seeking stock exposure without managing it themselves

Sector Fund (Sector Fund)

• Invests in stocks within a specific industry sector, e.g., banking, telecommunications, transportation (not less than 80%)
• Concentrates risk within one sector, leading to higher volatility than the market average
• High risk, high return potential
• Suitable for investors with high risk appetite and sector-specific growth outlooks

Alternative Investment Fund (Alternative Investment Fund)

• Invests in commodities, gold, oil, agricultural products, etc.
• Highly volatile and risky
• Suitable for high-risk investors seeking diversification into alternative assets

Important: No fund is a “one-size-fits-all” solution. Each investor must find a suitable mix based on their current circumstances.

Steps to Prepare Before Opening a Mutual Fund Account

Step 1: Assess Your Risk Tolerance

Basic question: “Would I worry if my portfolio drops 20-30%?”

Conduct a KYC test required by all fund providers to help identify your risk tolerance. Record your percentage response to compare with each fund’s volatility later.

Step 2: Analyze the Overall Economic Environment

Read data on economic indicators, inflation rates, interest rates, and stock market trends. Understanding this context helps you select appropriate asset classes at that time.

Step 3: Study the Fund’s Prospectus

When narrowing down your options, read the prospectus carefully to understand:

• Trading conditions
• Investment policies
• Liquidity of units
• Distribution methods
• Fund expenses

Step 4: Review Past Performance

Look for funds that:

• Consistently deliver returns over different periods
• Have relatively low volatility within their asset class
• Maintain balanced risk diversification

Step 5: Monitor and Evaluate Regularly

After investing, track performance periodically. As economic conditions change, you may need to switch funds to align with your investment strategy.

How to Calculate Profit and Loss

NAV: Fund Valuation Tool

NAV (Net Asset Value) is the net asset value of the fund, calculated as:

• The value of assets held by the fund (at the end of the day)
• Minus liabilities and accrued expenses

If NAV > your purchase price = profit If NAV < your purchase price = loss

Note: Profits and losses are (unrealized) until you sell your units.

Returns are of two types

Capital Gain

• Resulting from changes in NAV
• The normal return for all open-end funds

Dividend (Dividend)

• Some funds pay dividends periodically
• Investors receive returns without selling units
• If a fund provides both types of returns, combine them to measure net results

Summary: Starting Your Investment in Mutual Funds

No one is a natural investment genius from the start. Everyone has limitations—be it experience, time, or initial capital.

The advantage of mutual funds is that they help solve these issues:

Lack of knowledge? → Professional managers handle it No time? → No need for active monitoring Limited initial capital? → Can start with small amounts

Letting your money grow through mutual fund investments is neither difficult nor complicated. But neglecting to do so and letting your money stagnate, losing value due to inflation—that’s truly risky.

Once tools like mutual funds are available to assist, the only thing left is to get started.