When it comes to investing in mutual funds, choosing the best allocation strategy is very important. For an average investor, the best way to invest in mutual funds is to invest across multiple types, with each asset allocated to a mutual fund as the key to investment success.
There are three main types of mutual funds which offer the best investment portfolio that satisfies an investor’s objectives. They include:
Money Market Funds: They are less risky and offer higher rates when compared to a standard savings account. However, given its maturity profile (30-365 days), these funds are liable to reinvestment risks.
Money market funds benefit when interest rate increases.
Bond Funds: These are funds invested in bonds or other debt securities, and this investment is suitable for investors with dual objectives (i.e. capital preservation and income generation).
When investing in bonds, it is necessary to bear the interest rate in mind. This is due to the inverse relationship between bond price and interest rate i.e. as the interest rate increases, bond price decreases.
Stock Funds: They incur more risk than the bond and money market funds because stock markets are highly unpredictable. Stock funds are categorized based on the type of stock they invest in, the investment style of the stock, portfolio and geography. Although this type of mutual fund bears higher risks than others, it has a higher growth potential.
The best way to decide on the category that suits your needs, is to define the time frame for your investment/savings.
If you wish to save for a month to 1 year, then we recommend you invest in the money market mutual fund. However, if your time frame is between 1-3 years then a bond fund would be most suitable for you. Finally, if you intend to save for a period longer than 3 years, then the equity or multi asset fund is best for you.
A key benefit of investing in mutual funds is diversification. An example of how you can fully diversify is to invest 40% of your money in a bond-based mutual fund, 30% in a money market based fund and 30% in an equity based mutual fund. This suggested allocation produces optimal diversification, which shields you from heavy losses, and positions you for strong gains. This is what long term investment is about.
At FBN Capital Asset Management, we offer several mutual funds that suit your investment needs. For further enquiries, contact FBN Capital Asset Management today!
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