Mutual fund investors do not find it easy to name more than two of their favourite funds because they compare them on performance rather than specific stocks, bonds and other financial instruments. Mutual funds are passive investments, and in investing in them, they trust mutual fund managers to provide the best returns by choosing the right investment through their expertise and experience.
Generally, investors do not have large enough portfolios to make individual equity or bond selection on their own as individual investors. Moreover, the mutual fund investors are also exposed to undue risk from one or two bad choices which form a big part of the total holdings because the average retail portfolio is usually insufficiently diversified with individual stock picks. These are the reasons why investment clubs are a better option for retail investors who are dissatisfied with the passive form of investment and looking for an active role in investments.
Investment clubs can be thought of as a mutual fund on a smaller scale. They are similar to mutual funds and can be established even as a legal entity with legal partnership or a limited liability corporation which makes it similar to mutual fund in term of framework. In such a setup, a committee of non-professionals makes decisions based on its knowledge and experience. But the best part is the absence of management fees levied by all mutual funds on their unit holders – this fee plays a big part in determining the return from mutual funds as it involves a substantial amount.
But an investment club has major drawback that the returns or losses of the club depend totally on the abilities of the club members to choose the right investments for the pooled funds. Whereas in case of mutual funds, when members invest in fund companies, they are effectively buying the expertise, experience and skills of the mutual fund managers of the company who are going to manage the money. It is same in case of investment clubs, with the difference that the skills and management capabilities are non-professional.
Usually the members of an investment company meet once a month; review the existing portfolio and discuss new investment opportunities. Every member in the club is free to voice his or her opinion regarding the performance of the present pooled funds and discusses new investment. Under investment club, the members act collectively to make investment decisions based on their investment research.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.