Each type of mutual fund be it stocks, bonds, and money markets have different characteristics in its management. Therefore, price movements are also influenced by different factors. To be clearer, let’s discuss one by one.
Equity Fund
It is clear that this type of mutual fund contains shares selected by the investment manager, so the price movement of this mutual fund is influenced by the price of all shares in the mutual fund.
How do stock mutual fund prices move?
Imagine like this, suppose that one of the shares in a mutual fund is a stock of a food company. Then this year, because the economy is doing well, more and more people are buying food from the company.
As a result, the company’s profits increased. Investors reacted positively to see this, thereby increasing the company’s stock price. Now, if the shares are in a mutual fund, the mutual fund will also increase in price. The opposite can happen when the economy is down.
But you don’t need to worry about decreasing one stock, because the investment manager has spread funds to several selected stocks so that overall risk can be minimized. However, keep in mind that equity funds have the most volatile price volatility compared to other mutual funds.
Bond Mutual Funds
In this mutual fund, all investment in the bonds (both government and corporate bonds) will be made by the investment manager.
How do bond mutual fund prices move?
There are 2 things that affect the price, namely:
1. Interest paid by bonds: every time there is a division of interest (also called coupons) from bonds, investment managers usually will use the coupon to be reinvested in bonds. As a result of this reinvestment, the NAV price of bond mutual funds will increase.
2. Bond price increases: besides coupon distribution, bonds also have prices that can go up / down.
Usually when the economy is down, bonds are considered a safer place by investors, so it is more desirable. As a result of more demand, the price has increased. When the price goes up, the NAV of bond mutual funds will also increase.
What do you think about bonds price when economy improves? Does it mean bad bonds when the economy is improving? Indeed, the price tends to go down at a time like that, thus putting pressure on mutual fund NAV. But, do not forget that bonds continue to pay interest (coupons) regularly, so that the price stability can be maintained. This is why Bond mutual funds are more stable than equity funds.
Money Market Funds
This type of mutual fund is the most stable movement compared to other types. How come?
The reason is the majority of the contents of this mutual fund are short-term debt instruments, namely bonds with maturities of less than 1 year and deposits. There are still bonds, but the price movement is not significantly influenced by economic turmoil, because the bonds are only short-term. And assisted with deposits that also pay fixed interest according to the agreement with the issuer.
This payment of interest from short-term bonds and deposits will increase the price of NAV / unit of money market mutual funds. Due to the stability of interest payments / coupons, the increase in mutual fund prices has also stabilized.
Now, you already know that the price of each type of mutual fund reacts differently to economic conditions. Some are stable, some are not stable. In other words the price movement is indeed volatile. So, we cannot predict with certainty the benefits gained in the future.
Because it’s hard to predict, what we need to do is invest according to our risk profile and keep doing it routinely. Also make sure you spread investment funds to 3 types of mutual funds, so the results are more stable.
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