A mutual fund is a professionally managed investment vehicle that invests in a diverse portfolio of securities, including stocks, bonds, money market instruments, and other assets, by pooling the capital of several investors. A mutual fund seeks to minimize risk through diversity while producing returns for investors.
What is a Mutual Fund?
A mutual fund is an investment vehicle that pools capital from multiple investors to purchase a diversified portfolio of securities, including stocks, bonds, money market instruments, and other assets. The primary objective is to generate returns for investors while minimizing risk through diversification. These funds are managed by professional fund managers who make investment decisions aligned with the fund’s stated objectives.
Mutual Funds vs. Unit Trusts in South Africa
In South Africa, the terms mutual funds and unit trusts are often used interchangeably. Both refer to collective investment schemes governed by the Collective Investment Schemes Control Act (CISCA), with no legal or practical distinction between the two. 
Unit trusts operate by pooling money from various investors into a single fund, which is then divided into equal units. Each unit represents a proportionate share of the fund’s underlying assets. Investors can buy or sell these units, with the unit price reflecting the current market value of the assets divided by the number of units in issue.  
How Do Unit Trusts Work?
1. Pooling of Funds: Multiple investors contribute their money into a single unit trust fund.
2. Investment in Assets: The pooled capital is invested in a diversified portfolio of assets such as equities, bonds, and money market instruments.
3. Unit Allocation: Investors are allocated units based on the amount invested and the current unit price.
4. Professional Management: Qualified fund managers oversee the investment decisions, aiming to achieve the fund’s objectives.
5. Earning Returns: Investors earn returns through dividends, interest, and capital appreciation of the underlying assets.
Benefits of Investing in Unit Trusts
• Diversification: Spreads investment across various assets, reducing the impact of any single asset’s performance on the overall portfolio.
• Professional Management: Access to experienced fund managers who make informed investment decisions on behalf of investors.
• Liquidity: Units can typically be bought or sold on any business day, providing investors with flexibility.
• Affordability: Allows individuals to invest with relatively small amounts, making it accessible to a broader range of investors.
• Regulation and Transparency: Unit trusts in South Africa are regulated by the FSCA, ensuring adherence to strict standards and providing investors with regular, transparent reporting.