Mutual funds: the pros and cons of an investment tool to fight inflation

The rampant inflation raging across the world in recent months has forced almost everyone to reconsider how to handle their savings. This led to the general public's increased interest in tackling inflation, or at least how to mitigate its consequences. One tool that has been around for a while and is being talked about more and more is mutual funds. How do mutual funds work and what do they offer? And  tricky?

What is a fund and what types of them exist?

What is a mutual fund?

Essential for every mutual fund are its shareholders. These are the investors who put their funds into the fund and in exchange receive unit certificates. In addition to shareholders, most funds also have a portfolio manager taking care of the entire fund's portfolio. Most common funds are those buying currencies, bonds or shares.

What mutual funds are out there?

As mentioned, each of the funds has its own investment portfolio. The basic division can therefore be according to the composition of this portfolio, i.e. into currency, bonds or shares. However, it is not written anywhere that the manager of the given fund cannot mix these assets. Funds can be divided according to the overall risk of the investment, namely: conservative, mixed or dynamic. Another area is also associated with risk assesment, according to which the various funds are divided is investment horizon. The three most commonly used categories of investments are short-term investments, medium-term investments, and lastly, long-term investments. Conservative funds most often fall into the category of short-term investments, medium-term funds are mixed, and dynamic funds are classified as long-term investments.

How to start investing?

The most common ways of investing in mutual funds are one-time or regular. In the first case, the investor decides to invest the entire amount at once or in a very short period of time. A regular investment then consists in the fact that the investor sends smaller amounts at regular intervals.

What are the risks of investing?

Both the above-mentioned ways have their pros and cons. With a one-time investment, the risk of a sudden drop in the price of the asset hangs in the air. For example: it can happen that the investor invests his money in the period when the curve of the graph is peaking. After some time, a drop may occur, and the investor is at risk of a loss that can amount to tens of percent of the original deposit. What carries the biggest risk in this method of investing is also actually its biggest advantage. An investor can enter the fund at a moment when the price of the portfolio is considered low, while any significant rise can suddenly occur, which will then significantly increase the value of the invested funds (sometimes in the industry called as “buy the dip” — meaning investing when the price of the asset dropped or “dipped” down with hopes of going up after the purchase)

Regular investments lack this kind of "adrenaline". The principle of this method is to invest in smaller amounts and at regular time intervals, which should lead to an averaging of the price curve and to some extent eliminate the volatility of the given asset.

This strategy is mainly used for long-term investment horizons, which assume that the given area has growth potential in the distant future. In the past, it was mainly the stock market which, despite all its fluctuations, showed steady growth in the long term.

Mutual funds and fees

Mutual funds as we know them today, were not created solely for the purpose of generating profit for their shareholders. First of all, it is primarily about making a living for the investment companies that set up these funds. Therefore, even if you provide your funds to the funds, you may encounter various high fees that the funds apply in order to maintain their operations.

Every experience with a mutual fund starts with joining it. The investor usually pays the entry fee at the very beginning. Most often, this fee is set as a percentage, while the fee increases with the amount of potential return that the fund offers. Conservative variants therefore charge less than the most dynamic ones. The fee amount regularly ranges from around 0.4% of the value of the investment to the amount of one percent. Fund  are no exception to this and the entry fees may end up being much higher.

As you may remember the beginning of the article, there was a mention of a portfolio manager who is in charge of the management of the entire fund. Even this person does not work for free and the investment companies have to pay him. That is why they charge their shareholders a so-called management fee. Its amount can vary, and again the rule usually applies here that the more dynamic the fund, the higher its fee. Yes, even these fees are usually set as a percentage, when the initial values ​​range in tenths of a percent and the upper limit can be pretty much unlimited. Only index funds, which have no manager behind them and only copy the selected index, can deviate from this well-established trend. Management fees are absolutely minimal in this case.

The only way for the shareholder to get his money is to sell the shares and exit the fund. Though is also an opportunity for some funds to increase their profits, which is why you may encounter withholding fees at this stage as well. Such amount depends solely on how confident the investment companies are and how much they are willing to charge their investors in order to not deter them by the fees, but still maintain a chance to jack up their profits a bit even at this part.