What are mutual funds and are they worth it?
As usual, most of my work are done in office and thus please refer to the link for the costs breakdown of a typical investor in a mutual fund.
To start off, Investopedia probably makes a better definition on mutual funds than me, as quoted:
'A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.'
However, the part that is of concern to us Singaporeans, or rather because we live outside the USA, is the fact that most mutual fund companies are domiciled in the USA, which means that regardless of what market they are investing in, be it European equities, China Government Bonds, Indian Sovereign bonds, or even Singapore stocks, the entire mutual fund is registered as a USA 'stock', this means that it would be subjected to withholding taxes, see more in the link above.
Additionally, mutual funds are typically actively managed and are not index-based. As such, it is very difficult to measure a fund's performance due to the lack of suitable benchmarks. One reason to invest in a mutual fund is probably due to the diversification available and as such we will not be concerning ourselves with very specific and actively managed funds.
Mutual funds allows an investment into a huge diversified portfolio that can include government bonds, blue chip stocks, corporate bonds and even commodities, all in one fund. For those who are interested in such an asset then mutual funds such as Fidelity Funds - Global Multi Asset Income might be for you.
Thing is, these funds are by no mean cheap to purchase and by that I mean the recurring costs of the fund itself, among others. Sometimes the superior diversification and returns might be outweighed by the costs that comes with it and the investor might be better off purchasing local shares that has a more attractive return.