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Mutual Funds

Investopedia defines a mutual fund as "an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus." (http://www.investopedia.com/terms/m/mutualfund.asp).

Various mutual funds are available to the defensive investor and these funds on average require a monthly contribution or a hefty lump sum. For graduates entering commerce a monthly contribution would probably be the safest option. If one has to follow the value investment methodology prescribed by the great Benjamin Graham, then it would be most appropriate for the defensive investor to invest in mutual funds as follows:


  1. 75% of available cash flow in equity or optimum growth funds
  2. 25% of available cash flow in bond funds
Or:
  1. 70% of available cash flow in equity or optimum growth funds
  2. 20% of available cash flow in equity of optimum growth funds
  3. 10% of available cash flow in global emerging market/developed market funds
The principle of diversification is imperative here. 

Equity funds should in most instances represent funds that track the top stocks/shares of a given stock exchange. Optimum growth funds are also advisable as they provide above inflation returns. The best flexible allocation fund in South Africa as voted by Morningstar (an independent investment resource specialized in fund investing, see http://www.morningstar.com/) was the Coronation Optimum Growth fund. This fund's performance benchmark is the inflation rate (CPI) plus 5%. This fund therefore attempts to provide a return on capital of CPI+5%. (See www.coronation.com/assets/PDF/Static/Optimum%20Growth.pdf‎)

There are various funds available and each has their own specific benchmark and costs. Be on the lookout for a fund that charges various fees on the returns generated on capital. 

To be continued...............................


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