When it comes to the world of investment and finance, you can easily feel overwhelmed by all the terms and products available. This is especially true for expats living in China who are interested in investing in China. In this series, we will explain some of the fundamentals of investing starting with the concept of Mutual Funds.
What are Mutual Funds?
A mutual fund is a pool of money from various investors that a professional fund manager manages. This manager invests the money in a variety of stocks, bonds, and other securities based on the fund’s objectives. In simpler terms, a mutual fund provides you with the chance to invest in a diverse portfolio without having to spend too much time researching and managing investments.
Why are Mutual Funds Popular?
Mutual funds are popular because investing in individual stocks can be risky, particularly if you have little knowledge of the market. Mutual funds offer a safer and more convenient option for you to invest in China. With the ever-increasing prices of real estate and the unpredictability of the stock market, mutual funds have become a preferred investment tool for many.
For example, let’s say you want to invest 1000 USD. You decide to split it between 3 shares of Amazon at 160 USD each and 3 shares of Tesla at 190 USD each for a total of 1050 USD. Now let’s say our friend Elon Musk decides to tweet some interesting opinions about Tesla and the share price drops by 10%! You just lost 57 USD or a little over 5% of your assets! Since you did not know many companies, you gravitated toward familiar companies like Tesla and Amazon. After this fiasco, you realized following Elon may be too risky for your liking. Diversification and knowledge are the two main issues Mutual Funds address for you. To add a layer of challenge, this is even more difficult for you as an expat in China to discern which Chinese companies are worth investing in!
How do Mutual Funds Work?
Firstly, you purchase shares of a mutual fund from a fund house or asset management company. These shares are then invested in various assets, allowing you to diversify your portfolio with limited risk. The value of these shares is called Net Asset Value (NAV) and is calculated daily based on the market value of the underlying assets. As the value of the fund’s assets fluctuates, so does the Net Asset Value, and consequently, the value of your investment.
Benefits of Mutual Funds
The benefit of investing in China via mutual funds is instant diversification, meaning your investment is spread across different sectors, companies, and securities, reducing the risk of potential losses. Secondly, mutual funds are highly liquid, allowing you to buy or sell shares easily. Moreover, mutual funds are professionally managed, giving you access to the knowledge and expertise of experienced fund managers who do extensive research and analysis to ensure better returns for your investment.
Drawbacks of Mutual Funds
However, mutual funds have their drawbacks too. One of the most significant disadvantages of mutual funds is the management fees that the fund house charges. These fees are deducted from the NAV, reducing your overall returns. Additionally, market risk is always a factor, and while mutual funds can help mitigate them, they are not exempt from risks. The fluctuation of market conditions affects the value of the underlying assets, and in turn, the value of your investment.
Mutual funds have become an essential part of the investment landscape, offering you a convenient and relatively safe way to invest your money. With the increasing popularity of mutual funds when investing in China and around the world, it’s essential for you to understand the basics of these investment vehicles. As the famous Chinese proverb from Lao Tzu goes: “A journey of a thousand miles begins with a single step.“
Don’t wait, take that first step and start investing in Chinese mutual funds today!
