In an era of declining interest rates on savings accounts, mutual funds are emerging as an attractive option for investors seeking higher returns. However, as with any investment, it’s crucial to weigh the potential benefits against the risks involved.
The fundamental principle of a mutual fund is straightforward: multiple investors pool their resources, entrusting them to professional managers who oversee and grow the investments. These funds comprise a diverse portfolio of securities and cash, divided into individual shares.
One of the primary advantages of mutual funds is their potential for significantly higher returns compared to traditional savings or term deposit accounts. While savings accounts currently offer maximum returns of around 5%, the average Czech investor achieved a remarkable 12.2% return on mutual funds over the past year, according to the Czech Investor Index CII750 compiled by Swiss Life Select.
However, it’s important to note that returns can vary widely depending on the type of fund chosen. Less risky funds typically offer lower returns, while riskier funds have the potential for higher gains. As Petr Jermář from Banky.cz explains, “Some investors may prefer a lower-risk fund with a lower expected return, while others might opt for a higher-risk fund with potentially higher returns”.
Investors should also be aware of the fees associated with mutual funds, which are not typically present with savings accounts. These may include entry and exit fees, as well as management fees. Entry fees can range from 0.5% to 5%, depending on the type of fund, while management fees usually fall between 0.5% and 2.5% of the asset volume.
Despite these considerations, mutual funds can offer substantial growth over time. For instance, if an investor were to deposit 100,000 crowns initially and then contribute 500 crowns monthly, with an annual return of 7%, they could expect to have 113,232 crowns after one year and over 176,000 crowns after five years, even after accounting for fees.