The case for mutual funds

Business

The case for mutual funds

The Sterling Report

BY Yanique Leiba-EbanKs

Sunday, February 23, 2020

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Each investor must find their style and preferred type of investment.
This is not dissimilar to a person shopping for an outfit where one particular dress may make you look fat, but someone else looks fabulous in the very same outfit.


To drag out the analogy a little more, we have all been in a store and the salesperson is telling you that you look great, but you are wondering why your reflection is not confirming her assertions! If you rely on her advice, you may find that when you reach home, your loved ones question your judgement.


Similarly, talking to friends about financial matters can be helpful, but only if you have similar circumstances and objectives. Mutual funds elicit different reactions from different people; some have had great experiences, others may have been bitten before. However, there are some conditions that are ideal for mutual funds.


A small portfolio is usually the biggest catalyst for a mutual fund investment. Unfortunately, placing a limited sum in a single investment is a lot riskier than many people may appreciate.


Nowadays you can't invest in anything with less than US$10,000 (apart from stocks, mutual funds, and unit trusts) and this forces you to narrow your selection to one investment. This immediately limits your ability to diversify your risk, and instead of a portfolio, you are stuck with one single investment.


A mutual fund solves this issue by allowing for excellent diversification without the risk of a single instrument.


Liquidity is another consideration. If you buy one bond, using the example above, and you find yourself needing to pay an urgent medical bill, you may be forced to sell at a loss, or you may not need the full proceeds of the US$10,000, but are forced to sell the whole thing. With mutual funds, you can sell a portion if an emergency arises and keep the rest invested.


Market access is yet another consideration. You may have an interest in a specific sector that may require very large minimums, for example, some bonds have a minimum of US$200,000 or in the case of an international equity fund, you may wish to gain exposure to large technology stocks in the U,S but realise that when you compute the value, you don't have that much money.


Just to keep it real, a quick search yielded the following results: Google's (Alphabet) share price was at US$1,501.26, Amazon's share price was at US$2,117.22, and if you are into Tesla, that share price was trading at US$896.67.


So, without being a maths whiz, you can see that it would take a sizeable investment to build a portfolio if that is where your interest lies.


Now, this is not to say that there aren't numerous other considerations that weren't mentioned here, because of course there are.


One has to consider timing — I mean, it is so difficult, if not impossible to time the market, but do you think that prices are high? In addition, are the fees excessive? Have you seen the track record of the mutual fund?
But more importantly, if you are a high net worth investor, it may be more suitable for you to build your own portfolio under the guidance of your trusted financial advisor.


Happy investing!!!


Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.


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