Archive for the 'Mutual Funds' Category

19
Jan
08

Mutual Funds Basics

WHAT ARE MUTUAL FUNDS?

Mutual funds are money-managing institutions set up to professionally invest the money pooled in from the public. These schemes are managed by Asset Management Companies (AMC), which are sponsored by different financial institutions or companies.

Each unit of these schemes reflects the share of investor in the respective fund and its appreciation is judged by the Net Asset Value (NAV) of the scheme. The NAV is directly linked to the bullish and bearish trends of the markets as the pooled money is invested either inequity shares or in debentures or treasury bills. Indian Mutual Funds unveils this multi-dimensional avenue, with its intricacies, in a fashionable manner as mutual funds up-hold ample scope of generating decent returns by some thoughtful investment

 Concept of Mutual Funds

 

Mutual Fund Operation Flow Chart

Mutual Fund Operation Flow Chart

 Mutual Funds – Organisation

There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:

Organisation of a Mutual Fund

Organisation of a Mutual Fund

Advantages of Mutual Funds

 The advantages of investing in a Mutual Fund are:

  • Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
  • Professional Management: Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.
  • Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.
  • Liquidity: It’s easy to get your money out of a mutual fund. Write a check, make a call, and you’ve got the cash.
  • Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet.
  • Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index
  • Transparency
  • Flexibility
  • Choice of schemes
  • Tax benefits
  • Well regulated

Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:

  • No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
  • Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or “loads” to compensate brokers, financial consultants, or financial planners. Even if you don’t use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.
  • Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.
  • Management risk: When you invest in a mutual fund, you depend on the fund’s manager to make the right decisions regarding the fund’s portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.



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