Benefits of investing in different asset instruments, by FBN capital

FBN Capital Asset Management has urged investors to invest across a number of different mutual funds in order to diversify risks. According to the bank, choosing the best asset allocation strategy is very important when picking the best mutual funds to invest in.

It explained that a quick and easy way to establish which category of mutual fund suits the needs of an investor is to determine how long the investor wish to save/invest for.

The bank explained that an investor that wishes to save for one month to one year should invest in a money market mutual fund, while a bond fund would be most suitable for one to three years’ investment.

An equity or multi-asset fund, according to the firm is most suitable for longer than three years investment.Given the maturity profile of money market funds (30-365 days), the bank noted that reinvestment risk is higher in a money market fund than in a bond fund, while a money market fund benefits from a rising interest rate environment. It explained that a bond fund is a fund that invests in bonds or other debt securities.

“Some investors prefer to invest in a bond fund because they often have a dual investment objective which is the capital preservation and income generation. In addition, bonds are regarded as less risky than stocks but riskier than money market securities and are thus suitable for investors willing to take on some risk.

“When investing in bonds, an investor should bear interest rate risk in mind. There is an inverse relationship between bond price and interest rates. If long- term interest rates rise upward, prices of bonds will dip. Stock funds are regarded as the riskiest of mutual funds, as stock markets can be highly unpredictable.

“These mutual funds are principally categorised according to the type of stock they invest in, the investment style of the stock in the portfolio, and geography. Investing in a stock mutual fund may carry higher risks than investing in bond or money market mutual fund, but their growth potential is also higher.

“An example of how an investor can fully diversify is to invest 40 per cent of the money in a bond-based mutual fund, 30 per cent in a money market mutual fund while the remaining 30 per cent goes into an equity- based mutual fund.

A key benefit of investing in mutual funds is diversification.”Furthermore, the bank noted that diversifying further across a number of different mutual funds with varying risk and reward characteristics would lead to even more diversification benefits.

For the average investor with enough disposable income to invest in more than one mutual fund, this suggested asset allocation, according to the bank would produce optimal diversification.

“Your well-balanced investments across a number of mutual funds should shield you from heavy losses whilst positioning you for strong gains. This is what long term investment is all about, it added.