Investing in Mutual Funds vs Investment in Cryptocurrencies, Stocks & other assets

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  • May 12, 2020
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12 May 2020.

With the current situation unfolding across the global markets, highlighting the unprecedented fall in oil prices, the upcoming Bitcoin block reward halving, and excessive Fiat currency printing (brrr), a lot more attention is being directed to stocks, bonds, cryptocurrencies and commodities. People are becoming more and more concerned with protecting their wealth, creating new opportunities and reducing their risks. 

With the increasing interest in these topics, we put together a short article to help you understand the advantages and disadvantages of investing through Funds or directly investing into Cryptocurrencies, Stocks and other assets on your own. 

Firstly, we’ll define what a Mutual Fund is and then we’ll discuss what is meant by investment in Cryptocurrencies, stocks and other assets on your own. And, lastly, we’ll take a look at the pro’s and con’s of investing in a Fund or going at it alone. 

What is a Mutual Investment Fund?

A Mutual Fund is a supply of capital that belongs to a number of investors. Mutual funds are investment strategies that allow you to pool your money together with other investors in order to purchase a bundle of stocks, bonds, other securities, or cryptocurrencies that may have been difficult to purchase on your own.

Investors invest in Mutual Funds by purchasing share units of the fund. The price of the mutual fund is determined by the total value of the securities in the portfolio, minus any expenses, divided by the number of the fund’s outstanding shares. This is known as the net asset value (NAV). The net asset value fluctuates based on the value of the securities held in the fund portfolio at the end of each business day.

While the supply of capital in a mutual fund is used to collectively purchase securities, cryptocurrencies and other assets, investors do not own the securities that the fund invests in. They only own shares in the fund itself. 

It’s important to note that individual investors cannot make decisions about how the fund should invest its assets, and instead adhere to the funds’ investment strategy. Individual investors choose to invest in a fund based on the Fund’s performance, goals, risks, fees and other factors for example, whether or not the fund invests in companies that are doing good in the world over those who are extracting value at the expense of the long-term well being of the people and the planet.

A Mutual Fund is a supply of capital that belongs to a number of investors. Mutual funds are investment strategies that allow you to pool your money together with other investors in order to purchase a bundle of stocks, bonds, other securities, or cryptocurrencies that may have been difficult to purchase on your own.

Investors invest in Mutual Funds by purchasing share units of the fund. The price of the mutual fund is determined by the total value of the securities in the portfolio, minus any expenses, divided by the number of the fund’s outstanding shares. This is known as the net asset value (NAV). The net asset value fluctuates based on the value of the securities held in the fund portfolio at the end of each business day.

While the supply of capital in a mutual fund is used to collectively purchase securities, cryptocurrencies and other assets, investors do not own the securities that the fund invests in. They only own shares in the fund itself. 

It’s important to note that individual investors cannot make decisions about how the fund should invest its assets, and instead adhere to the funds’ investment strategy. Individual investors choose to invest in a fund based on the Fund’s performance, goals, risks, fees and other factors for example, whether or not the fund invests in companies that are doing good in the world over those who are extracting value at the expense of the long-term well being of the people and the planet.

All funds appoint a Fund Manager/s. Fund Managers are employed to oversee the fund and decide on which securities, cryptocurrencies and other assets to be held in the fund, as well as the quantities that should be bought or sold and when. It is the fund managers duty to meet the Mutual Funds investments objectives.

Investing in a Mutual Fund

What are the upsides of investing in a Mutual Fund?

Diversification

Mutual Funds present an investor with broader selection of investment vehicles and therefore diversification. Diversified holdings have often proved to be extremely effective at minimising, and managing investment risk. By ensuring exposure to a multitude of assets, as the value of a particular asset in the portfolio decreases, another could increase, balancing the investment once more.

Expert Management

A further value add from a Mutual Fund is that they employ teams with experience and expert knowledge about the markets they invest in. These teams research the market and analyse trends which in turn empower better investment decisions. 

Convenience

Mutual Funds also make investing in a multitude of assets more convenient for an investor. The fund manages all trading, research and other paperwork.

Affordability

Sometimes it is difficult to invest in certain opportunities. Mutual Funds can enable investors to gain exposure to companies with share prices that are far too expensive to acquire their own. This enables an investor to participate in revenues of some of the worlds largest companies. 

Reinvestment of Income 

Mutual funds provide an investor with the added benefit of reinvesting dividends and earned interests into additional share in the fund. This allows an investor to grow their portfolio without having to pay transaction fees for the purchase of additional shares. 

The downsides of investing in an Investment Fund

No Control over Portfolio

When one invests in a fund, they have no control of the portfolio being invested in. Only the Fund’s manager has control over the Fund’s investment choices.

Capital Gains

Every time you sell a stock, you are taxed on the gains you’ve made but whenever the fund distributes gains after selling individual holdings, you are taxed, even if you haven’t sold your shares.

Cash Drags

Mutual Funds need to maintain cash assets in order to maintain liquidity for purchases and satisfy investor redemptions. Investors still pay for assets that are in cash, as annual fund expenses are assessed on all fund assets, whether they’re invested or not.

Fees and Expenses

All Mutual Funds have an annual expenses charge. This is simply the cost of doing business and it is often expressed as an expense ratio, which most funds have, making it easy to compare the fee structure of different funds. Note that some Mutual Funds also charge an initial fee when an investor gets into a fund.

What does it mean to invest directly in Cryptocurrency, Stocks and other assets?

Directly investing in Cryptocurrencies, Stocks and other assets is when an investor purchases cryptocurrency, stocks, bonds and commodities without the use of an indirect method like an ETF or mutual fund. 

This is usually done online by creating an account on a trading platform where the investor can deposit money and purchase an asset of his or her choice, or, it is done by investing directly. Investing directly is usually done when an investor purchases stocks directly, normally via a stock broker.  

There is a vast ocean of assets that one can invest in and with all of these options it is important for an investor to study the assets and markets before they invest into them. 

The investor plays the same role that the fund manager would play in managing a Mutual Fund. The investor has full control of what to invest in, when to buy and sell, as well as the quantities he or she trades. This form of investment requires some level of experience as well as sufficient knowledge of the markets that are being invested in.

Investing on your own

The upside of investing on your own

Control

When you invest on your own, you have complete control over what you invest in and when you invest.

Less costs

There are less costs when you invest on your own as you don’t have to pay annual fees to a fund or advisor.

Financial Knowledge

Through investing on your own, you’re obliged to do your own research and this can result in an  improvement of skills in terms of financial analysis and gaining expertise from an investment perspective over time.

Downsides of investing on your own

Knowledge (Market and Technical)

A diverse set of skills and knowledge like financial analysis, market cycles, industry analysis, key ratios and valuation metrics are required to make a well informed decision while investing.

Accessibility 

Some assets are difficult to purchase on your own and some may also only be available to certain people. For example, some companies only allow direct investment from employees or existing shareholders.

Time

Investing is a time consuming activity in terms of research and market analysis.

Risk Management

Risk Management can be divided into two parts: 1) Risk with respect to the portfolio 2) Risk with respect to operation. The former refers to benefits of dollar cost averaging, hedging etc. while the latter refers to trading platform errors, order input and execution errors.

Security 

The investor should use a reliable broker/exchange with proper due diligence.

To Summarise

Leveraging the knowledge and expertise of professionals is often more convenient and in some cases more effective, after all fund managers are experienced and will have contingency plans as well as other recovery strategies to turn to should the market turn unfavourable or should a good opportunity present itself. It’s likely that an experienced professional will firstly detect the opportunity early and secondly be in a better position to take full advantage of the given opportunity.

However, Investing on your own provides you with more flexibility, if you have enough capital and expert knowledge of the markets you’re investing in, and you know how to offset your risk effectively with the right kind of diversification, then investing on your own can be worthwhile. 

Most importantly, whether investing in a Mutual Fund or investing on your own. Conducting your own research is paramount to selecting an investment that suits your investment objectives. 


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