A Mutual Fund is a financial tool that consists of money from many investors to invest in securities. Mutual funds are managed or operated by the portfolio manager or fund manager, who allocate the money from various investors and invest their money into different types of investment plans such as stocks, bonds, equities, money market instruments, etc.
Generally, Mutual funds is the kind of funds or type of funds where investor can use their money to gain higher returns with the help of spent their money into Mutual Funds with the help of professionals by directly open their Demat account in a bank or NBFC online or indirectly by brokers or companies offline by paperwork.
Investing in a share of a mutual fund is different from investing in shares of stocks. Investors of mutual fund shares do not have any voting rights. The performance of mutual fund companies affects the value of mutual funds.
Every investor owns units of the funds, which represents the holding of the funds for specific securities. The gain or profit distributed proportionally in every investor after deducting all expenses.
All procedures are calculated under the scheme NAV (Net Asset Value). The fund’s NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.
The net value of an asset = (Total asset – total liabilities)/ total outstanding shares
Advantages of Mutual Funds
- Mutual funds are fully regulated by Governments.
- Mutual funds are very liquidity in nature. It means you can buy or sell anytime your units. But remember there is an exit load when you redeem or switch your fund before one year which is normally 1%. Mutual fund transactions happen only once a day after the fund house releases the day’s NAV.
- The Fund manager spread the risk by investing in various classes of assets such as Money Market Instruments and Capital markets instruments all procedures called Diversification. With the help of diversification when one class doesn’t perform well then the fund manager transfers it to other funds that provide high returns.
- If you buy multiple units at a time, the processing fees and other commission charges will be less compared to when you buy one unit.
- Mutual funds are managed by an expert management system. They take care of your investment and make decisions about what to do with your investment.
- Mutual fund investment is very easy to start. Anyone can start it easily with a minimum amount of Rs. 500. No matter how your income is.
- You can invest up to Rs. 1.5 lakhs in mutual funds under the mutual fund’s Tax saving schemes. ELSS funds are the best example of tax-free mutual funds.
- Mutual funds are also available auto-debit facilities to investors.
Disadvantages of Mutual Funds
- When you invest in mutual funds then you don’t have any control over your funds. You give up all your control of mutual funds to Funds managers.
- Some mutual funds charge the sales charges called load charges. It means when you redeem or switch your fund before one year then you would be charged a minimum 1% called exit load charges on total redemption amount.
- All funds charge some annual expenses called the expense ratio. The expense ratio is expressed as a percentage and is what you pay annually as a portion of your account value. The average for managed funds is around 1.5%. Alternatively, index funds charge much lower expenses (0.25% on average) because they are not actively managed. Since the expense ratio will meet directly into gains on an annual basis, closely compare expense ratios for different funds you’re considering.
- Investors always choose funds by searching on fund’s previous records which are fully different from the current situation of market and funds.so it is difficult to analyze funds.
If you have the stomach for stocks, but neither the time nor the inclination to do homework, invest in equity mutual funds. –Peter Lynch
Mutual Funds is like riding a bicycle to get better returns, you must keep moving.
— Nikneh (Founders of Funds Instructor)
Invest right and holding tight will make your future bright.
–Nikneh (Founders of Funds Instructor)