In the market, there are a lot of investors who have small savings, which they are unable to invest in since the amount is very small. Here comes a mutual fund where these investors can pool their savings and invest in such equity only by another means. This is known as mutual funds, where asset management companies come under the picture. They pool up the savings of such investors and then invest a larger amount in these equities or other securities, and after deducting their operating costs, they distribute the returns to the investors.
How do the investors gain? The investors stand to gain since the quantum of investment is large, the returns earned are also large and hence the benefit accrues to the ultimate investor, which is the common man. What is the benefit to the AMCs? The AMCs stand to gain since they get a handsome commission for the work performed by them, and this leads to a win–win proposition for all the players in the market.
There is also a great benefit to the market since the small savings are channelized in the market, and there is a flow of funds in the market which, unless otherwise, would not have been possible.
Mutual funds have been very lucrative to various categories of investors like the retired persons can opt for those mutual fund schemes which give regular stable returns, whereas young professionals can opt for schemes where the returns are very high since the finance theorem clearly states that the returns earned in any equity or fund are directly proportional to the risk associated to it.
Advantages and Disadvantages of mutual funds
- The funds are managed by a team of professionals who put in their experiential skills to manage the funds.
- The investor has the advantage of hedging his risk by investing in a basket of varied securities.
- The investor can invest even a small amount and earn a higher rate of return.
- The investor can earn through the market where the returns are high and better and also streamlined.
- The fund managers can pass the advantage of less cost and more returns, and hence the benefit accrues to the end investor.
However, there are some disadvantages to mutual funds, such as:
- The investors have put a blind belief in the fund managers.
- The fund management fee is sometimes too high.
- The fund managers may / may not pass the transaction savings to the investors.
- The fund managers are not liable for poor judgment when the investor’s fund loses earnings.
- The issue prospectus and annual reports are difficult to understand
- The investor feels a loss of control since they have no idea about the investment pattern.
- There are a lot of restrictions on selling and change in the portfolios.
Types of mutual funds
There are various types of mutual funds in the market. Depending upon the desire and need of the investors, the market keeps on creating a lot of changes and keeps on coming out with a lot of types of mutual funds.
Since there is a lot of variety of investors in the market, it becomes imperative for the market to create and innovate mutual fund schemes to benefit the investors as well as the market as a whole.
Some of these various types of mutual funds are:
- Value stocks
- Growth stock
- Income stock
- Index funds
- Enhanced index
- Stock market sector
- Defensive stock
- Mutual funds of mutual funds
- Exchange traded funds (ETFs)
Also, there are other types of funds that may be close-ended or open-ended. Close-ended funds are those where there is no entry load as well as no exit load. This allows the investor to move in and out freely in the mutual fund scheme. Here the investor enjoys the privileges of returns from the market. When the returns are more, the investors start investing, and when the returns fall, the investor takes their investment out and invests elsewhere.
On the other hand, open-ended schemes are those mutual fund schemes where the investor has to either pay the entry load, i.e., the commission to the brokers for entering into the mutual fund schemes. This pits a load on the investor, and hence the investor invests in such schemes only when they have convinced themselves of the premium in the returns that they may earn.
There are schemes that may be equity-oriented or debt oriented. Equity-oriented schemes are those mutual fund schemes where the investor can ensure that his savings are being only invested in the equity shares so that his desired risk-return profile can be met.
There are some investors who want a stable return; they can invest their funds in debt-oriented schemes so that their desires can be met.
There are a lot of tax-saving mutual fund schemes also being sold in the market where the investment is made in only those avenues where the investor can ultimately save on his taxes, and this all can be done in a legal manner.
For citing this article use:
- Agarwal, A. (2016). Insights into Indian Mutual Fund Industry Performance and evaluation strategies.