Investment in Mutual Funds

November 17, 2008 by  
Filed under Stock Market

Investment in Mutual Funds

 

Mutual Fund is an investment firm which raises money from the general public and invests in stocks, bonds, real estate or money market, and then distributes the gains to its shareholders. It employs a group of professionals (fund managers or portfolio managers) who are experts in analyzing the market trends and invest appropriately for good returns and lower the risk of losses. A mutual fund provides a Prospectus in which it states its objective as how the raised money would be utilized. The Prospectus would state the sectors where the money would be invested, past performances, fees, how to purchase and redeem the shares, fund managers’ profile etc.

 

Types of Mutual Funds

There are many types of Mutual funds which you may choose depending upon your profile and choice. Below is the list of some of the common types of Mutual Funds:

 

a)     Tax saving Funds

b)    Sector Schemes

c)     Index Funds

d)    Global Funds

e)     Income Funds

f)     Growth Funds

g)     Balanced Funds

 

Mutual Funds are often classified as Open-ended Funds or Close-ended Funds. In Open-ended Funds the shares can be bought or sold at any time whereas in the close-ended scheme there exists a lock-in period for investors and new buyers can buy only from the Secondary Market (once the offer period is closed). Close-ended Funds usually provide tax-benefits as the invested money is locked in for 3 to 5 years or even above. Open-ended Funds provide the opportunity of withdrawing your money if you feel the fund is performing poorly. A Mutual fund can be bought directly from the Mutual fund Company (issuer) or through Mutual-fund brokers.

 

Advantages of Mutual Funds

There are many advantages of investing in Mutual Funds which include Diversification of Risk, Liquidity, lower Transaction costs, Tax benefits etc.

 

Diversification of Risk

Unlike the stocks, your money is diversified across shares, bonds, money market or various sectors in a stock market. The fund managers have great experience and knowledge who are in a better position to handle financial risks. As your Investment is diversified the risk-level is lowered.  

 

 

 

 

 

Lower Transaction Cost

As the Fund management company employs a huge sum of money and invests in share market, the transaction cost gets reduced. If you as an Individual have to invest in share market your transaction cost would be higher as your investment money would be much lower compared to them.

 

Tax Benefits

Mutual Funds offer a great deal in saving money through Tax Benefits. As an Investor you could enjoy returns (dividends) from your Investment and on the same time reduce your tax liabilities.

 

Liquidity

The benefit of liquidity applies only to open-ended schemes. During the time of your financial crisis you can very well withdraw your money by selling the funds.

 

Disadvantages of Mutual Funds

The returns in Mutual Funds are not assured. Even though you buy a mutual fund based on its past performances it is not guaranteed that you would receive the same returns. There might be times when the fund managers decide to buy or sell assets that may not be favorable to you. In some funds there might be entry-fee or exit-fee which is an additional burden for you.  In case of close-ended funds although you enjoy the tax benefits you may not be able to withdraw your money at the time of crisis or when the fund is performing badly.

Enter Google AdSense Code Here

Comments

Comments are closed.