Mutual Funds IndiaFinance » Mutual Funds
The mutual funds were first introduced in India in 1963 with the launch of Unit Trust of India (UTI) by the government. This company retained its monopoly in the market till 1987 when several new financial companies entered the market with their funds. The competition further increased in the 1990s when private players were allowed to enter the market. Although mutual funds have been introduced in the country for the past several decades, several surveys indicate that less than ten percent of Indian households have invested in mutual funds. The main reason for this could be attributed to the risk involved in this type of investment and the lack of knowledge about the various types of mutual funds.
As the name suggests, a mutual fund is money that is pooled by several investors and invested mutually in a scheme. You would not be required to manage the funds on a regular basis but would be hiring someone who could do this on your behalf. Although the returns of this kind of investment looks quite tempting, you should know that various pros and cons of investing in mutual funds before spending your hard earned money on them.
Some of the Advantages of Mutual Funds are as Follows:
- Professional Management: This is the biggest advantage of investing in mutual funds (MF). Although you may not have expertise to manage your funds, MF makes it possible to have it managed by people who are experts in this field.
- Diversification of Funds: After you invest your money, you fund manager makes sure that it is invested in diverse assets so as to minimize the risk of loss. If the stock of a particular company does not pay well, then this can be compensated when another stock yields good results. As the funds are mutual, small investors too can benefit from this kind of investment.
- Regulatory Oversight: In order to protect the interest of the investors, SEBI has formulated several rules and regulations and it keeps revising them. The fund managers are required to keep their investors updated about the investments that they have made, the stocks they have purchased out of their funds and the amount invested in every asset.
- Convenience: It is very convenient for people to buy MF. Although you buy one MF, you get the benefits of various portfolios as your fund managers invest in diverse stocks. So you can enjoy the benefits of diversification. You can also easily buy and sell funds; you can also move from one fund to another within a MF company very easily.
- Liquidity: If you invest in open ended schemes, you get your returns very quickly by paying a small amount of fees. If you have close-ended scheme, you can sell it off at the existing market price very easily. You can even buy back directly some of the close-ended and interval schemes that you have sold at some point of time.
- Flexibly: There are various kinds of plans available in the market these days. You can invest in one that suits your convenience, preferences and the amount you plan to invest. You can easily buy and sell a MF.
- Cost Effective: MF is quite cost effective as there are several investors who want to invest in the market. So this reduces the commission changes you have to pay. You can choose to invest in a diversified portfolio as less as Rs. 10. If you have a no-load fund, you have to pay nominal charges to own them.
- Return Potential: It is unlikely that you would lose all your money invested in MF. The main reason for this is that the investments made are usually quite diversified. So if an investment in one asset fails, you can count on the other investment to pay off. However, read all the terms and conditions carefully before you invest.
Some of the Disadvantages of Mutual Funds Include:
- Costs: If you ask someone else to manage your investment on your behalf, you would obviously be charges a fee for it. When you exit form the mutual fund, you will have to again pay a certain amount for it.
- Fund Management: If the fund managers are not very experienced or are unable to predict the market changes correctly, then chances are that you may lose money and have no gains at all. So you should choose a fund manager who has lot of experience and also a good track return.
- Taxes: You have to pay taxes for the gains irrespective of the fact that you are not of a taxable age or have a taxable income. This holds true for all except some types of MFs like equity funds etc. Another disadvantage of investing is that the fund manager cannot invest all the money and has to maintain some amount of liquid cash because the investor can demand his or her share at any point of time.
Thus, when you invest in any type of mutual fund, you should know the risks involved. Read all the terms and conditions before you invest and do not expect too many gains from them. Also do not invest everything you have in one type of MF as on one hand it could be a very risky prospect but on the other hand a very profitable one if you know its intricacies and know which one would suit you best.