WHAT IS MUTUAL FUND ? AND ADVANTAGES & DISADVANTAGES OF MUTUAL FUND.

WHAT IS MUTUAL FUND ?

MUTUAL FUNDS

Mutual fund is the type of market security that enables the investors to pool their money together at one professionally owned platform. Investments can be made in stocks, bonds, cash or combine of those assets. These are like basket full of funds and each basket hold certain type of stock bond that are combined to make a one mutual fund Portfolio.

A mutual fund is a common pool of money into which investors put their contributions that are to be invested in different types of securities with the stated objective accordingly.

·       An equity fund would buy equity assets such as ordinary shares, preference shares, warrants etc.

·       A bond fund would buy debt instruments such as debenture bonds, or government securities/money market securities.

·        A mix of equity assets and debt instruments will be in Balance funds

·       Mutual Fund shareholder or a unit holder is a part owner of the fund’s asset.

ADVANTAGES & DISADVANTAGES OF MUTUAL FUND

 ADVANTAGES & DISADVANTAGES OF MUTUAL FUND.

Advantages of Mutual Funds

Simplicity:

Anyone can made investment in mutual funds, as there is no experience in finance or economics is required to be a successful investor. Also investors can plan their mutual funds investment as per their budget and growth criteria.

Diversification:

Mutual funds have different class of securities in which investors can invest their money. Some securities offer high risks and some have fewer risks, so accordingly investors choose according to their suitability. It is often said that mutual funds are subjected to market risk, and the advantage is that this risk can be diversified.

Multiple investment options:

There are number of investing options available in mutual funds. Depending upon the choice of source of funds investors can invest in any scheme. They can choose their funds according to investment objective but also according to the amount of returns they want to drive out of their amount invested. Mutual funds also offer the option of regular income flow in the form of dividend payout facility.

Flexibility of switching funds

Mutual funds come with an option of fund switching which means the investors can switch between schemes or between funds to get better terms and better returns from their investment. But in most of the cases, this option is available only between schemes of the same fund and not between the funds offered by a particular company.

Tax-saving advantages

Investment in mutual funds also provides tax-saving benefits to investors. If the investors invest their money in schemes such as equity-linked savings schemes (ELSS) then they get tax-deduction benefits under Section 80C of the Income Tax Act, 1961. As per the Income Tax Act, a mutual fund investor is allowed to have tax deduction benefits up to the amount of Rs.15000. Hence, when investment in such tax-saving schemes is made then the investors got the benefit of not paying income tax for the amount of money that has been invested in the mutual fund scheme.

 Professionally managed:

Investing in mutual funds is easy. These funds are professionally managed by expert and experienced fund managers who have excellent experience in managing funds. So, the beginners who don't even have any knowledge about the market can invest in such funds with the help of expert managers. As all the funds are managed by experts so the investors who newly entered into the stock market can be fully assured about their investments. Also the experts properly managed your portfolio, look at the investment growth and design strategies to stand alone in market with high and stable returns.

Smart investment option:

While doing investments if the money is pooled in only one specific sector then there is a risk of losing the entire money. If the industry or particular sector where you have invested your money fails, then you might lose all your money. However, this is not the case with mutual fund investments. While investing in mutual funds the associated risk is relatively low as most of the mutual fund schemes offer the investment in multiple schemes in different sectors. Hence, if any one of the sectors faces a loss then the gains from the other sectors will compensate the amount that you have lost. This risk mitigation benefit makes mutual fund investments a smart investment option compared to other investments.

Well-regulated funds:

Mutual fund investments are regulated by the Securities and Exchange Board of India (SEBI) in india. SEBI has laid down several rules and regulations which are needed to be followed by all the mutual funds providers in the country. All the investments made in the funds have to be according to the SEBI guidelines so as to ensure that the investment works in favor of both investors and providers without any fault. Being monitored and supervised by an authorized body like SEBI, the investments under mutual funds are secured and well-regulated.

Lump sum investment or in installments

Mutual Funds offer investments for those who don’t have huge amount of funds to go further at once. Like there are people who have not that much income or we can say students who don’t have paying capacity, in both the cases people can invest in mutual funds by opting for the SIP investment option. A SIP is a Systematic Investment Plan which allows the investors to invest in mutual funds in installments (EMIs). When investment in a SIP is been made then there will not be much pressure on our finances. On the contrary, if investors have huge finances then they can go for lump sum investment.

Disadvantages of mutual funds

Too many choices:

While choosing mutual funds there are several options available according to the investment, style, strategy and size. There are over 10,000 mutual funds in operation. All these funds are available for each and every sector all over the country or region. Thus the selection of appropriate fund can proved to be tedious process for the investors.

Loss of Control:

All the major decisions regarding the selection and sale of securities are taken by the mutual Funds managers themselves. This will create a barrier for the investors while managing their Portfolio. Sometimes decisions like tax savings formulas taken by the fund manager may not be optimum for the investors. At that time one should be remember that he/she is trusting one with their money that will gone to provide them some return.

Fees and Expenses:

 Most mutual funds charge management and operating fees that pay for the fund's management expenses (around 1.0% to 1.5% per annum for actively managed funds).

Also, some mutual funds charge high sales commissions, 12b-1 fees, and redemption fees. And some funds involves share trading so often that the transaction costs add up significantly.  Most of the expenses are charged ongoing basis due to which the cost adds ups more.

Dilution:

In general diversification helps in the risk reduction of the prospective investors but it can also be a con due to dilution of funds. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings.

Trading Limitations:

 Although mutual funds are highly liquid in general but most mutual funds cannot be bought or sold in the middle of the trading day. They can be bought and sold only at the end of the day, after they've calculated the current value of their holdings.

 Poor Performance:

 Returns on mutual funds are not guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and it’s been a major issue raised by investors that the stock picking capabilities of fund managers are not professional.

No Insurance:

Although mutual funds are regulated by the government, but is not insured against losses. The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds.

This means that despite the risk reducing diversification benefit provided by the mutual funds, the loss can still occur and sometimes the whole investment can also be lost.

WHAT IS MUTUAL FUND ? 

AND 

ADVANTAGES & DISADVANTAGES OF MUTUAL FUND