Investing in a fund can be a great way to diversify your portfolio, access professional management, and invest in a variety of assets. In this post, we'll explain why you might want to consider investing in a fund and how to choose the right one for your investment goals. We'll also talk about some of the potential risks and how to avoid them.
What are Funds?
A fund is like a giant pot of money where lots of people can put their money together and invest in things like stocks, bonds, and real estate. Instead of keeping their money under their mattress, they give it to a professional who will use it to buy all sorts of investments. This way, they can diversify their investments and get help from someone who knows what they're doing without having to become a stock-picking expert themselves.
Funds are a great way for people to save up for things like a new house or their retirement without having to have a rich uncle in the family.
Types of Funds
Funds generally fall into 2 categories:
- ETFs (Exchange Traded Funds)
- Mutual Funds
Mutual funds and ETFs are both ways for people to pool their money together and invest in a variety of assets. The key difference is in how they are bought and sold: mutual funds are typically purchased directly from the investment firm that manages the fund, with pricing determined at the end of each day based on the fund's holdings; ETFs, on the other hand, trade on stock exchanges just like regular stocks, with prices fluctuating throughout the day based on supply and demand.
Another thing to note is that many investors outside the US have very limited access to US mutual funds. Many international brokers don't offer access to mutual funds because they may not have the necessary infrastructure and regulations in place to offer access to US mutual funds to their clients. As a result, investors outside the US may have difficulty finding and investing in US mutual funds.
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Why invest in Funds
One of the main reasons to invest in a fund is diversification. By investing in a fund, you can get exposure to a range of different assets – like stocks, bonds, and real estate – without having to buy them all individually. This can help reduce the overall risk of your investment portfolio and make it less volatile.
Another advantage of investing in a fund is that you get professional management. Many funds are run by experienced investment professionals who know the markets inside out and have the expertise to pick the right investments. This can help make sure your money is being looked after properly and is well positioned to make the most of market opportunities.
Choosing a Fund
When choosing a fund to invest in, it's important to think about your investment goals and how much risk you're willing to take. For example, if you're looking for long-term growth, you might want to consider a fund that invests in stocks. If you want a steady income, consider a fund that focuses on dividend paying stocks, or sukuk (as a halal alternative to bonds). It's also important to carefully review the fund's track record, fees, and investment strategy before making a decision.
While investing in a fund can offer many potential benefits, there are also risks to consider. The value of your investment in a fund can go up or down depending on the performance of the underlying assets. And the fund's managers might make poor investment decisions that hurt the fund's performance.
What if a fund isn't halal?
Roughly 250 of the 500 stocks in the S&P500 are halal, so stocks have a 50/50 chance of being halal. However, since funds are large collections of stocks, this same state of affairs makes it practically impossible for you to find a fund that is 100% halal by accident. Of the 10,000+ US listed funds, only 6 are Shariah compliant.
So what do you do if you want to invest in a fund, but can't because it isn't compliant?
One option is to research and identify Shariah-compliant funds that align with your investment goals and risk tolerance. These funds may be less common, but they do exist and can provide a viable investment option for individuals who want to follow Shariah principles. We've written a whole post dedicated to covering the Shariah compliant funds available today. The limitation you'll find with Shariah compliant funds is that they are very limited, and have alot of overlap between them -- making them ineffective for diversification.
There is another option that only just became public earlier this year. We launched a "Fund Purifier" that lets you invest in purified versions of popular funds -- giving you a lot more diversification, and a whole lot more. You can learn more about the Fund Purifier here.
In summary, investing in a fund can be a great way to diversify your portfolio, access professional management, and invest in a variety of assets. By considering your investment goals, risk tolerance, and the potential risks and benefits of investing in a fund, you can make an informed decision and potentially maximize your investment returns.