Today we will introduce you to Ivan Petrov - an average Plovdiv resident of 36 years, with an average income and a good family. And with his friend from high school - Peter Ivanov, also an average Plovdiv resident, who, unlike Petrov, has accumulated really not innumerable riches, but a relatively high amount that allows him to live peacefully. Petrov envied his classmate nobly because his teaching profession did not allow him a particularly high income, but he also heard that good money could be made in the financial markets.
An investment with high liquidity, economies of scale, diversification, transparency and professional management. His friend from school, Peter, also talked about these things, which sounded like a mandarin to him. And he reassured him that this could be achieved even by the average citizen without much knowledge, as long as he trusted the specialists.
Over a glass of beer one evening, Peter quoted to Ivan the thought of the American writer Ron Chernow (author of the book The Life of Rockefeller, etc.) that investing in a mutual fund gives people the feeling that they are investing on an equal footing with the "big boys". And so Ivan began to get excited about the idea.
Advantages of investing in mutual funds
One of the most important rules that both large and small investors follow is asset diversification, which Peter seems to have mentioned in passing. "Diversification, Ivan, is actually a variety - not of the women you date, but of the assets you invest in" Peter explained, adding that it is used for risk management and includes various combinations of portfolio investments.
"In order to achieve a truly diversified portfolio, it may be necessary to buy shares of companies from different industries and bonds with different maturities from different issuers. And for the individual investor, this can be quite an expensive endeavor" said Peter in front of Ivan, who was blinking and scratching his head. Therefore, according to Peter Ivanov's experience, it is good for more inexperienced players to trust, for example, a mutual fund to manage their money.
According to the financial expert, another factor that should not be underestimated is the provision of economies of scale. Here Ivan understood the idea, because his school also saved on scale by buying textbooks in bulk at a discount from the catalog price. It is logical, said Peter - if you have to create a separate diversified portfolio, it would certainly cost more. Just imagine how many deals need to be made in order to achieve the diversification that a fund offers. Transaction fees would be relatively high, thus consuming some of the funds. The costs will increase with each desire to change the portfolio. However, mutual funds are able to make deals on a much larger scale and it will cost you less, said Peter.
And he then came to explain one of the biggest advantages of mutual fund investments - the ability to benefit from investments in the capital markets with much smaller amounts and regularly than if you wait to set aside a larger amount to invest alone. This is exactly what finally won Ivan over - as we said, with his teacher's salary it would be unthinkable to spend a large amount and play with it on the market.
Peter also reminded him of the liquidity and flexibility that is important to all investors - Ivan could "enter or exit the investment at any time" and as he had already mentioned, make regular investments every month or on other periods more suitable for him. Thus, with each salary or bonus, Ivan could set aside 100 BGN for his investments.
And, of course, he could count on the professional management of his funds by the team of experts with serious experience in finance - as opposed to his serious pedagogical experience. And these experts could do constant analyzes and research and on their basis make the most appropriate decision at any given moment.
And to Ivan, all this is starting to sound more and more interesting than the history classes in high school...
The article is part of the joint educational project "Alphabet for Investors", launched by Investor.bg and the Management Company "Compass Invest" JSC. The project will last for six months and aims to expand knowledge about investment opportunities in the markets, among people who have interest in trading in various financial instruments.
The article is not a recommendation for making an investment decision.