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Understanding Mutual Funds is easy as it is a simple concept. A mutual fund is a company that collects the money of many investors - its share holders - to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders and each investor holds a pro-rata share of the portfolio. Mutual funds are subject to market fluctuations.
For individual investor, mutual funds provide the benefit of having someone else manage your investment and diversify your money over many different securities that may not be available or affordable to you otherwise. Even the smallest investor can get started in mutual funds.
A mutual fund, by its very nature, is diversified - Its assets are invested in many different securities.
Why Invest in Mutual Funds
Investing in mutual funds has various benefits which makes it an ideal investment avenue. Following are some of the benefits.
Professional Investment Management
One of the primary benefits of mutual funds is that an investor has access to professional management. A good investment manager is certainly worth the fees you will pay. Good mutual fund managers with an excellent research team can do a better job of monitoring the companies they have chosen to invest in than an individual can. The investment professionals who manage the funds in mutual funds have real-time access to crucial market information. |
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versification
A crucial element in investing is asset allocation. Small investors do not have enough money to properly allocate their assets. By pooling the funds with others, individual investors can benefit from greater diversification.
Liquidity
In open ended schemes, you can get your money back promptly at net asset value (NAV) prices from the mutual fund itself.
Transparency
Regulations of Mutual Funds have made the industry very transparent. You can track the investments that have been made on your behalf and the specific investments made by the mutual fund scheme to see where you money is going.
TYPES OF Mutual Funds
Mutual Funds schemes can be classified according to both their investments objectives - like income, growth, tax saving - as well as the number of units - If these are limited the fund is close-ended and if the number is unlimited the fund is open-ended.
Open Ended Schemes
Open-Ended schemes do not have a fixed maturity period. Investors can buy or sell units at NAV (Net Asset Value) related prices from and to the mutual fund on any business day.
These schemes have unlimited capitalisation, do not have a fixed maturity, do not have cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not listed on any exchange.
Close Ended Schemes
Close-Ended schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. After that such schemes can not issue new units except in case of bonus or rights issue. However, after the initial issue, investor can buy or sell units on the stock exchanges where they are listed. |
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Growth Funds
Growth Funds look for growth of capital with secondary emphasis on dividend. Such funds invest in shares with a potential for growth and capital appreciation. They invest in well established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential. Growth Funds provide low current income.
Growth and Income Fund
Growth and Income Fund seek long term growth of capital as well as current income. The investment strategies used to reach these goals vary among funds.
Fixed-Income Funds
Fixed income funds provide current income consistent with the preservation of capital. These funds invest in corporate bonds or government-backed mortgage securities that have fixed rate of return.
Fixed-Income Funds seek to minimise risk by investing in low risk principle backed instruments.
Fixed-income funds are suitable for investors who want to maximise current income.
Balanced Fund
Balanced funds aim to provide both growth and income. These funds invest in both shares and fixed income securities in the proportion indicated in their offer documents. Balance Funds are ideal for investors who are looking for a combination of income and moderate growth.
RISKS
All investments involve some form of risk.
Market Risk
The price or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both a highly profitable company may be affected. This change in price is known as Market Risk. |
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Inflation Risk
If inflation is higher than your earnings, you will actually be able to "buy" less with your money.
Credit Risk
How stable is the company to which you lend your money when you invest ? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures..?
Interest Risk
Changing interest rates affect both equities and bonds in many ways. Investors are reminded that predicting rates is rarely successful. To avert interest risk, it is advisable to invest in a diversified portfolio.
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