15 Jun 2022 | Edukatips

Mutual Funds: Definition, Types, and How to Invest

A mutual fund has become one of the preferred investment vehicles for the public to put their money into, especially among novice investors. This is because mutual funds are subject to investment risks and managed by a professional Investment Manager.

Financial freedom has grown stronger as the most future-looking step and is directly proportional to information and ease of investment. For this reason, we should learn more about investments and their types. 

Let’s look at the following in-depth explanation about Mutual Funds!

Definition of Mutual Funds

A mutual fund is an investment vehicle made up of pool money collected from investors and henceforth invested in Portfolios of Securities by an Investment Manager. There are three keys to investing in Mutual Funds, namely investors, funds to invest, and an investment manager who manages the pooled funds.

In layman’s terms, a mutual fund can also be seen as an activity that pools money from many investors to invest in securities run by an investment manager. In Indonesia, the most common type of Mutual Funds is open-ended funds in the form of Collective Investment Contract (KIK). An open-ended fund refers to a mutual fund investment that can be traded at stock exchange at any time.

This type of investment is suitable for different types of investors as it comes in different types and risks. Investors often use this instrument for diversification (an investment strategy through which investors spread their portfolio around to lower portfolio’s risk, so if one of the portfolio is affected by a certain condition, it won’t have a significant impact on the investment). Since a mutual fund pools money from many investors, another benefit is that the investment can be made at an affordable minimum value, with only few hundreds of thousands to start.

Especially for those who are busy and barely have time to monitor and analyse market conditions, but wish to invest, then a mutual fund is the right choice for you because the investment manager will manage your funds.

Types of Mutual Funds

Based on the securities portfolio, mutual funds are divided into five types, namely Money Market Funds, Fixed-Income Funds, Balanced Funds, Equity Funds, and Index Funds. Look at the details below.

1.   Money Market Funds

A money market fund is a mutual fund that invests in money market investment instruments and debt securities with a maturity date of less than one year. It is the least risky of all Mutual Funds choices, with potentially small return and is relatively safe. Its primary purpose is to maintain liquidity and preserve capital. Securities in the Money Market Mutual Funds consist of time deposits, certificates of deposit, Bank Indonesia Certificate (SBI), and debt securities/bonds with maturities of less than one year.

2.   Fixed Income Funds

Fixed income fund is a mutual fund that invests at least 80% of assets in debt securities, with the remaining being invested in money market products.

Actually, Fixed Income Funds and Money Market Funds are nearly the same, the only difference is that the Fixed Income Funds have a greater risk compared to Money Market Funds, due to their longer maturities.

3.   Mixed/Balanced/Hybrid Funds

Balanced fund is a mutual fund that invests in a hybrid of asset classes, such as stocks, bonds or money market instruments. In other words, you are investing in stocks, bonds, and money market instruments in one securities portfolio. The objective is to pursue both income and capital appreciation.

Due to its hybrid of asset classes, balanced funds have relatively higher risk than those of Fixed Income Funds and Money Market Funds. Even so, they offer a potentially higher return.

4.   Equity Funds

Equity fund is a mutual fund that invests at least 80% of assets in equity/stock securities, with the remaining being invested in money market products. The objective is to increase unit value in the long run.

However, stock investments carry a relatively higher risk compared to other mutual fund choices. Still, they offer a higher return.

5.   Index Funds

Index fund is a mutual fund that invests at least 80% in securities based on a respective index as its benchmark. Index fund may consist of Bond Index Funds & Stock Index Funds.

The portfolio adjusts to each type of mutual fund, but uses index benchmark as a guide. Over time, the potential returns and investment risks also reflect each type of mutual fund. This means investors should heed which type of Index Fund fits their risk appetite.

How to Invest in Mutual Funds

To invest in mutual funds, investors must first open a securities account, get an investment ID number (SID) and invest in a mutual fund product. The investment manager will then manage these funds to generate returns for the investors.

These pooled funds will then be spread across investment instruments. Apart from managing these funds, an investment manager is required to oversee the portfolio and report to the investors.

However, to start investing in mutual funds, you should set your investment goals, whether it’s for pension fund, school tuition fees or other purposes.

Furthermore, the investors must also know the investment period and the type of investment risk profile. That way, you will easily determine which Mutual Fund product is the right investment for you.

You can invest in Mutual Fund at BCA through the Welma app or BCA branch that serves mutual fund transactions. One advantage of investing mutual funds on Welma is that investors can easily monitor their portfolio directly from their phones. There are regular investment features to help investors to be disciplined.

Risks of Mutual Funds

Similar to other investment instruments, mutual fund also carry risks. The risks are as follows:

  1. Risk of reduced value of participation units due to the changing of market conditions, defaults & force majeure of companies related to the invested funds and/or bonds.
  2. Risk of Changes in Regulations, Political & Economic Conditions, and Tax Provisions. Changes in law or policies may affect the performance of mutual funds/companies related to the invested funds and/or bonds.
  3. Risk of liquidity occurs if all or the majority of the Participation Unit Holders simultaneously redeem their mutual fund units to Investment Manager, in which the manager may be unable to meet their redemption obligations to pay out such redemption proceeds immediately.
  4. Risk of Exchange Rate is a risk that may arise from foreign currency exchange rate fluctuations against Rupiah.

All investment products, including Mutual Funds, carry their own risks. Investors are advised to invest according to their risk profile, and for this reason, BCA offers a solution to find out your risk profile at Welma upon SID (investment ID number) registration.

Furthermore, for your first investment transaction, you will get a cashback of IDR25,000, and for customers who invest in mutual funds & bonds at BCA, get a transaction fee-free promo. Wait no more! Download and invest via Welma now. For further information, please contact Halo BCA 1500 888 ext. 4 (for investment product services).