Tue | Sep 26, 2017

Financial Adviser | More on mutual funds

Published:Sunday | August 7, 2016 | 8:56 AMOran Hall

QUESTION: I am 24 years old and I recently realised that I haven’t been getting enough returns on the money in my regular savings accounts.

I started researching investment options and have since developed an interest in mutual funds. The problem is, I don’t know which ones would suit me and the income I earn, plus the goals I have. Can you tell me where I can go to start learning more about mutual funds?

My main goal for wanting to invest is for my little sister’s education (she is 10 and I take care of her) and for my own future financial security and freedom.

— Sherine

FINANCIAL ADVISER: I like the fact that you took the time to examine the returns on your money and that you are making an effort to identify suitable options with a view to getting better returns.

I also like the fact that you are interested in getting general information on mutual funds, which you have developed an interest in, before investing in them. There are many websites which aim to give information on mutual funds but I prefer this one— https://www.sec.gov/investor/p ubs/inwsmf.htm.

It is important to recognise, as you seem to do, that knowing your goals is necessary to determine the kinds of funds in which to invest. You should not expect to get a distribution from every mutual fund investment. One important feature of these funds is that the income they earn is reinvested, thereby resulting in their value increasing.

It is clear that you at least have an idea about your goals. What you really need to do is to make them more specific and set timelines for them. Your sister is 10 so I believe you could be thinking about secondary education but tertiary education as well.

For your part, you need to be clear about what you mean by “future financial security and freedom” and when you expect to achieve them. One advantage of mutual funds is that they are liquid so you should not have a problem converting to cash when necessary. This option thus gives you much flexibility, but bear in mind that they are long-term instruments.

LICENSED SECURITIES DEALERS

Mutual funds are not Jamaican securities although they are available from licensed securities dealers here. The CI Funds and the Scotiabank Mutual Funds are the mutual funds that are available here. The former offers about 40 funds which differ in many ways. Please see www.ci.com for details on the CI Funds and www.scotiainvestmentsjm.com for details of the Scotia Funds.

The companies which sell these funds locally are equipped to guide you in the selection of the funds which are suitable for you but you should be prepared to say what you want to achieve. Prior research by you can go a far way in creating a portfolio that best meets your needs. The investment advisers you speak to should be able to help you understand the funds they are offering and how they can meet your objectives.

You must be prepared to invest time to learn about mutual funds and to determine what your goals are so that you can match the funds to your goals.

It is also important to determine what level of risk you are prepared to take, recognising that the funds that will likely give you the best returns are more likely to expose you to higher risk, meaning you could make serious losses from these funds.

If you take a long-term approach, it is likely your returns will be higher. Although each fund is in effect a diversified portfolio, you can further diversify your portfolio by investing in several funds.

May I suggest that, although mutual funds offer you protection against the depreciation in the value of our currency, you take a look at unit trusts, which are similar to the mutual funds and some of which also offer protection against the local currency losing its value?

Investing in both types of instruments can be helpful. This approach can help you to build a more diversified portfolio, but you should be careful not to invest in too many funds and be prepared to wait; success will not come overnight.

- Oran A. Hall, principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. finviser.jm@gmail.com