WHY INVEST INTO MUTUAL FUNDS?

PROFESSIONAL INVESTMENT EXPERTISE

For a reasonable cost, investors will secure the services of a professional fund manager to manage the fund. Most investors would concede that they are unlikely to be able to outperform a professional over a reasonable period of time even if they had the time to devote to the portfolio of securities.

Nevertheless, it is true that in the short run at least, some fund managers do not always achieve good fund performance and very few seem capable of consistently beating their benchmark stock market index - the market "average" weighted according to the market capitalisation (share price x number of shares in issue) of the individual stocks. This latter point is dealt with later when considering the types of fund available and their respective merits. There are funds which actually seek to replicate the performance of a given stock market index, thus effectively guaranteeing that such a fund will not under-perform the market.

Unfortunately, the readily available performance league tables which measure the percentage gains or losses of funds with similar investment objectives do not always provide a reliable guide as to which fund should be selected. There is evidence to suggest that he who finishes "top of the pops" this year will be unlikely to repeat the performance next year. Past performance may not be indicative of the future. Nevertheless, it is probably best to follow those who have been successful over say a five year period. Any shorter period may be an unreliable guide, and a longer period may disguise poor recent performance. Also, successful individual fund managers given the responsibility for managing the portfolios of specific funds by their employers, the fund management companies, tend to be head-hunted and may move on to work for rival fund management companies.

None of this should detract from the opening statement that a professional fund manager should be able to outperform an amateur investor over a reasonable period of time. Indeed, in this competitive market, individual fund managers who fail to deliver tend to "disappear" very soon - the job may be compared with that of a football manager!