What are Mutual Funds?
A mutual fund is a professionally managed fund into which a number of investors have pooled their money. An expert is in charge of the fund and invests it according to the purpose of the fund.
Mutual funds are a type of investment vehicle. This investment vehicle pools funds from various stakeholders and uses them to invest in assets.
An equity oriented mutual fund invests mainly in stocks. A growth oriented mutual fund tries to invest in companies that are growing quickly.
A debt oriented mutual fund invests primarily in products related to debts, such as government bonds.
Advantages of Mutual Funds.
1. High returns. You can get some very high returns from growth oriented mutual funds – as the companies you invest in grow, so do your profits. Furthermore, mutual funds also offer some attractive dividends for shareholders, which is a good way of earning money without having to do anything.
2. Security. Many investors feel more secure pooling their finances with others as they can put in less money but still invest in significant assets. If the fund goes bust, you can turn to the other investors for support.
3. The presence of the fund manager: Your funds are usually kept in safe hands by an experienced fund manager who controls the investments.
4. Liquidity: At any point, shareholders have the freedom to convert the money they have invested in, and earned from, the fund into cash.
5. Higher investments. Because you are pooling your money with others, you can make higher investments than if you were investing alone. Shareholders can invest in much more profitable companies.
6. Attracting loans. When you offer to borrow a loan against mutual funds, you will often find that financial institutions are willing to lend you higher amounts of money than with regular loans.
7. Compatibility with your systematic investment plan. It is very easy to integrate a mutual fund into your SIP.
Disadvantages of Mutual Funds.
1. Fund management costs. Mutual funds require you to go to some expense to keep them running smoothly.
2. Risk. Equity oriented funds are riskier than debt funds – so be careful here. Further, whenever you make an investment, you run this financial risk.
3. Premature surrender charges. If you want out of a fund earlier than you had originally agreed, you will often have to pay for the privilege.
4. Complexity. Holding a variety of investments can be a very complex situation to navigate.
Mutual funds are a good way to invest and make money, however it is important to remember that there are additional risks, costs and controls involved.