Understand what a fund is and easily build your personal investment portfolio

Are busy professionals looking to manage their finances but have no time to research? Or are you feeling confused about investment analysis? Actually, there is a professional and relatively risk-controlled way to manage your finances—that is, mutual fund investing. This article will guide you through the basics, profit principles, and practical allocation to give you a comprehensive understanding of mutual fund investment.

What exactly is a mutual fund?

Mutual fund, officially known as a securities investment fund, refers to an investment tool issued by banks or brokerages that pools investors’ funds and is managed by a fund manager, with a custodian bank responsible for safekeeping. In simple terms, it is a collective investment method where investors entrust their money to a professional team for operation, characterized by profit sharing and risk sharing.

Depending on the underlying assets, mutual funds can be mainly divided into five categories:

• Money Market Funds: Invest in short-term bonds and commercial paper
• Bond Funds: Focus on fixed income instruments like government bonds, corporate bonds, etc.
• Stock Funds: Primarily invest in stocks
• Index Funds: Track specific market indices
• Hybrid Funds: Allocate assets across stocks, bonds, and other securities

How does mutual fund help you make money? Four key steps

To achieve wealth growth through mutual funds, you need to understand the entire operation process.

Step 1: How funds flow

Participants in mutual fund operations include three parties: Investors (fund unit holders), Fund Managers (fund management companies), and Banks (fund custodians).

When you purchase a fund, your funds are first pooled together, then the fund manager allocates and makes decisions based on investment strategies, followed by the custodian bank investing the funds into appropriate financial products. This process ensures the safety of your funds and professional management.

Step 2: Choosing the right fund type for yourself

Faced with numerous fund varieties, your choice should be based on your risk tolerance and investment horizon.

Money Market Funds are the lowest risk option, mainly investing in government bonds, corporate notes, and other short-term fixed income products, with excellent liquidity. Suitable for conservative investors who prioritize liquidity and safety, but note that long-term yields are usually lower.

Bond Funds generate interest income through investments in government and corporate bonds, with lower risk than stock funds. Among them, government bond funds have the least risk and relatively good liquidity, suitable for investors seeking stable cash flow.

Stock Funds mainly invest in stocks, with higher risk but greater return potential. Due to market volatility and management risks, they are suitable for long-term investors who can tolerate short-term losses.

Index Funds track specific market indices by purchasing all or some of the constituent stocks, replicating index performance. Common ETFs belong to this category, with good liquidity and minimal tracking error.

Hybrid Funds allocate assets across stocks, bonds, and indices to balance risk and return, with risk levels between bond and stock funds, ideal for conservative to moderate risk preference investors.

Comparison of various fund types:

Step 3: Understanding mutual fund costs

Before investing, be sure to understand the fee structure, as it directly impacts your actual returns.

Subscription Fee is charged at purchase, about 1.5% for bond funds, around 3% for stock funds, with some sales channels offering discounts.

Redemption Fee: Most funds in Taiwan do not charge redemption fees, but funds purchased through banks require paying a trust management fee (about 0.2% per year), deducted from the net asset value.

Management Fee is charged by the fund company for management services, usually between 1% and 2.5% annually; index funds tend to have lower fees.

Custodian Fee is charged by banks for safekeeping funds, approximately 0.2% annually.

Step 4: Building a personalized investment portfolio

Don’t put all your eggs in one basket; a scientific allocation can effectively reduce risk. Choose appropriate proportions based on your risk tolerance:

Risk-loving investors: Stock funds 50%, Bond funds 25%, Money Market Funds 15%, Others 10%

Risk-neutral investors: Stock funds 35%, Bond funds 40%, Money Market Funds 20%, Others 5%

Risk-averse investors: Stock funds 20%, Bond funds 20%, Money Market Funds 60%

Five major advantages of mutual fund investing

Compared to direct stock trading or other investment methods, mutual funds have unique advantages:

Asset Diversification: Mutual funds pool many investors’ funds to invest in stocks, bonds, commodities, and other assets, providing broad investment opportunities and effectively reducing over-concentration risk.

Risk Diversification: Funds are allocated across multiple asset classes, significantly weakening the impact of individual investment losses.

Professional Management: Managed by a team with deep market knowledge and research capabilities, ensuring higher decision quality.

High Liquidity: Most funds can be bought and sold at any time, allowing quick cash conversion when needed.

Low Investment Threshold: Most funds allow small purchases, with minimum investments around 3,000 yuan, suitable for small investors starting their investment journey.

Start your mutual fund investment journey

Compared to stocks, futures, and other financial products, mutual funds carry lower risks, with the biggest advantage being relatively controllable risk and low investment threshold. Mutual fund investments typically have longer cycles, making them more suitable for long-term asset allocation plans.

Regardless of the fund type, they are safer than directly participating in the stock market and allow you to enjoy the benefits of market growth. The key to successful mutual fund investing is choosing the right fund type, building a reasonable portfolio, and holding long-term, avoiding frequent buying and selling that can incur additional costs and emotional decision-making.