Investing in Mutual Funds: Understanding Mutual Funds & How to Invest them.

What are Mutual Funds?

A simple way to describe a mutual fund is a collective investment scheme. A mutual fund is an investment vehicle that allows multiple investors to collectively invest their money in a diverse range of assets. Mutual funds are attractive because multiple investors pool their money so they can invest in a wider range of assets than possible individually. Investment professionals are responsible for managing the portfolio holdings of the funds that are divided into units or shares and allocated to each investor in the pool based on their contribution.  

How mutual funds work:

1. Pooling of Funds – Individual investors contribute to a single mutual fund, and the total fund principal is used to invest in a diverse range of assets.

2. Professional Management – The fund is managed by investment professionals who aim to maximize returns for investors. 

3. Returns – Investors earn returns through capital appreciation, dividends, or interest income from the fund’s holdings.

4. Liquidity – Investors can buy or sell shares of the mutual fund at the Net Asset Value, usually on a daily basis.

Types of Mutual Funds   

Equity Stock Funds

Equity stock funds predominantly invest in company stocks using different investment strategies to reduce risk and maximize profits. Two common strategies are investing in undervalued companies with high growth potential and investing in specific sectors or industries poised for growth.

Bond Funds

There are two types of bonds. Government bonds and corporate bonds. When an investor buys a bond, they essentially loan money to an institution to facilitate projects & operations. The issuer of the bond is to pay the bondholder a fixed periodic interest rate throughout the bond's lifetime. On maturity of the bond, the bond issuer is to pay the bondholder the principal amount. Compared to stocks, bonds offer steady income in terms of interest with lower risk. 

Money Market Funds

Money market funds like the Ndovu fund invest in short-term, highly liquid securities such as treasury bills, certificates of deposit, and commercial paper. They are designed to offer stability and easy access to funds, making them a great choice for short-term savings and emergency funds. 

Hybrid Funds

Hybrid funds mix stocks and bonds to create a balanced portfolio, offering both growth and stability for investors looking for moderate risk exposure, capital appreciation, and steady income. 

Fund Type	Interest Rates	Expected Returns	Expense Ratio	Risk Level
Equity Stock Funds	Not applicable (focuses on stocks)	High potential but volatile	Higher due to active management	High
Bond Funds	Earns from fixed-interest securities	Moderate and stable	Moderate depending on bond types	Medium
Money Market Funds	Earns from short-term securities	Lower but stable	Lower due to passive management	Low
Hybrid Funds	Mixed depending on stock-bond allocation	Balanced between stability and growth	Moderate due to dynamic allocation	Medium

Benefits & Disadvantages of investing in Mutual funds.

Benefits of investing in mutual funds.

• Diversification - Spreads investments across multiple assets, reducing risk.

• Liquidity – Investors can buy or sell mutual fund units easily.

• Affordability – Allows small investors to access a professionally managed portfolio.

• Lower costs – Shared investment costs make it cheaper than managing individual stocks.

• Professional management – Expert fund managers handle investment decisions.

Disadvantages of investing in mutual funds.

• Tax inefficiency – Frequent buying and selling within the fund can trigger taxable events.

• Diversification might cause lower profits – Spreading investments too broadly can bring down high returns.

• High expense ratio – Management and administrative fees can eat into profits.

Mutual Fund Interest Rates, Returns, & Fees.

Every mutual fund has a document called the prospectus that details information about the fund's investment objectives, risks, performance, and expenses. Ensure to read through a mutual funds prospectus before investing in it.

Operating Expense Ratio

A yearly fee, expressed as a percentage of a fund’s assets, covers management and operational costs. Passively managed funds have lower OERs since they track an index, while actively managed funds have higher OERs due to ongoing investment decisions.

Load

A one-time commission is charged when buying or selling certain mutual fund shares, compensating brokers for their services. No-load funds do not charge this fee.

Transaction Fee

A trading fee charged by brokerages when purchasing or redeeming mutual fund shares, covering administrative costs.

Conclusion

Mutual funds allow you to invest in a diverse set of assets, balancing risk and returns based on your financial goals. Whether you are looking for high-growth equity funds, stable bond funds, or low-risk money market funds, there is an option to suit your needs.

With Ndovu, you can start investing effortlessly in both USD and KES money market funds, enjoying competitive returns and expert management. Download the Ndovu app today and take a step toward growing your wealth.

Disclosure:

 Ndovu is a regulated Robo-advisory platform operated by Ndovu Wealth Limited (‘NWL’). NWL is a Fund Manager licensed by the Capital Markets Authority (Kenya).

The information provided on this platform and the products and services offered are intended solely for persons in regions and jurisdictions where such distribution and utilization are in accordance with local laws and regulations. Ndovu does not promote its services in regions where it lacks the necessary licenses; It is exclusively available to persons residing in countries where it holds a valid license or has regulated partners. Ndovu does not extend its services to citizens of the United States, Canada, Japan, and other restricted territories.

Disclaimer:

 All ETF products are subject to risk, including country/regional, liquidity, and currency risks. Market prices of securities within the ETF may rise and fall, sometimes rapidly and unpredictably.

While ETFs provide diversification through exposure to a basket of securities, they do not eliminate the risk of loss. Diversification does not ensure a profit or protect against a loss. These are non-cis products and are registered by the SEC.