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| 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
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| 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.
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