What is a mutual fund, how does it work and what types are there?

Many people look for ways to grow their savings to achieve those goals they long for: buying a new home, getting a car, going on vacation to a dream place, and many others. Among so many options that the market offers, mutual funds are one of the most interesting and also reliable, since your money will be managed and invested by expert professionals.

A mutual fund is a set of contributions made by natural and / or legal persons with the aim of maximizing their profitability. These contributions are managed by a Mutual Fund Management Company, which invests them to make them grow. In the following note we explain in detail how this interesting alternative works and in what forms it is presented.

How do mutual funds work?

According to Interfondos, people looking for investment alternatives for their money find the mutual fund that best suits them and deposit their savings there through an approved bank or entity.

Then, the management company invests the money of the contributors in the Capital Market, in search of a higher profitability than that offered by traditional savings products. As the strategist at Inversiones Sura, Miguel Saldaña, explained to the Andina agency, mutual funds invest in traditional liquid assets, such as bonds and shares, which are listed on the stock market nationally and internationally.

What types of mutual funds exist in Peru?

These are the types of mutual funds existing in Peru:

• Mutual debt funds: They go out to invest in debt instruments such as bonds, commercial papers or certificates of deposits. They are the funds with the lowest risk or volatility.
• Stock mutual funds: They seek to invest exclusively in stocks. They offer a much higher return than other funds and are oriented to the long term. They also involve increased risk due to market and share price volatility.
• Mixed income funds: They invest in both fixed income instruments (such as bonds and commercial papers) and in variable income instruments (stocks). They compensate the level of risk with the combination of investments and an investment horizon longer than the short term so as not to expose the profitability to market fluctuations.
• Structured mutual funds: They seek to recover the invested capital or a percentage of it (not less than 75%) at maturity, and if necessary to achieve a fixed or variable profitability already established. Its investment policy is specifically structured to achieve the objective.
• Funds of funds: Its investment policy contemplates investing at least 75% of its assets in other mutual funds. Each can invest in a single mutual fund or more.
• Flexible mutual funds: those that do not quite fit the above definitions.

What types of funds should you invest in?

Everything will depend on your needs and your investor profile. The Association of Fund Administrators of Peru advises to take the following into account before choosing the mutual fund in which you are going to invest your money:

• Determine your investment objective. It can be a house, a car, a trip, etc.
• Define the time of your investment to meet your objective. It can be three months, six months, a year or more.
• Define your risk tolerance profile. The Association describes three types of profile: conservative (if you want to invest, but are concerned about any unfavorable variation in your investment), moderate (if you can accept certain variations to achieve higher returns) and aggressive (if you know the market and can assume high levels of risk as they will help you achieve very attractive returns, even if they are long-term, in addition to being willing to bear losses).
• Compare. You can consult with the administrators in the market and / or placement agents to receive the attention that helps you choose a mutual fund. Do not jump to the first option that appears, but you should try to obtain as much information as possible from each fund to see the one that best suits your goals. Review commissions, minimum periods of permanence in the fund and various other aspects.

Advantages of investing in mutual funds?

The Association of Fund Administrators of Peru mentions the following advantages of opting for a mutual fund:

• Cost effectiveness: Mutual funds offer a competitive and attractive return compared to other existing traditional savings and investment products.
• Availability: the mutual fund investor (participant) can dispose of his money more easily and flexibly no later than three days after request. There are minimum terms of permanence to be exempt from commissions applicable to redemptions that vary according to the chosen fund.
• Accessibility: Investing in a mutual fund gives you access to the Capital Market without having much knowledge or high investment amounts. It is easier, more direct and safer than investing on your own in various instruments and markets.
• Risk diversification: Investing in various financial instruments reduces the risk of investment loss. This diversification occurs in currencies, term, sectors, investment instruments, etc.
• Professional advice and administration: the advisers and professionals in investments and finances of the fund managers provide the support of an adequate and quality management.