An investment option made up by accumulating money that is collected from various investors with the purpose of further investing in stocks, money market instruments and many more assets. Professional money managers are those who usually handle the operations of mutual funds and they take care of allocating fund’s investments and are responsible for producing capital gains out of investments. A mutual funds portfolio has to be maintained in such a way that it invites more investments in the future and keep building its prospects.
There are many advantages, out of which few are,
User friendly and simple – Mutual Funds is one of those things which is very basic and simple in nature but is understood to be very complex. However, the fact of the matter is that mutual funds needs no prior experience or knowledge of anything like economics, financial markets, etc. Mutual funds can be availed at discount brokers online, mutual funds companies, banks and brokerage firms.
Diversification – Unlike share market investments, mutual funds lets you invest in hundreds or even thousands of different investments, thus multiplying the investment possibilities manifold. This option of investing in multiple mutual funds is a smart option.
Various types of Mutual Funds – With time, you will grow your portfolio as a mutual funds investor and you will want to venture into different types of mutual funds and different types. You also have the option of concentrating on major asset classes such as bonds, cash, stock) and also specialisations like sector funds or precious metal funds.
Affordability – Most mutual funds come with a very low investment slab which makes it easy for most of the common people to afford it. If the person in question invests on a systematic investment program where he/she buys a fixed number of shares on a monthly basis, cost of the initial investment comes down lower than usual.
Managed by professionals – Everything you think you should do is taken care of by professionals which leaves you not much to do. This is also considered the biggest advantage since hours of investors’ valuable time and energy is saved. It is not an easy task to do enough research and evaluate quality investments and this is also done by professionals too.
Flexibility – Almost all the advantages of mutual funds endorse simplicity and flexibility. You can either invests in one fund or choose to invest in multiple funds with so many technically proficient strategies like automatic deposit, short-term savings, annuity sub-accounts in place to guide you. All these strategies make sure it is not at all difficult for both beginners and also advanced investors to invest and reap harvest.
Market Risk – The prices or yields are subject to change anytime, be it either increase or decrease. This can happen to the prices of any particular market. In these cases, all types of companies, irrespective of performance, get affected similarly. This is the kind of impact that market risks have.
Inflation Risk – This is also called as the ‘The Loss of Purchasing Power’. At times when the inflation rate outgrows your earnings on investments, the risk of buying less increases.
Credit Risk – It is always important to be learned of the stability of the company in which you invest. This kind of risks arise when you are uncertain of the company paying you the interests you were promised when the investment completes the maturity period.
Interest Rate Risks – Equities and bonds are equally disturbed or impacted when the interest rates are changes. It is this change in interest rates that determines the bond prices in the financial system. Generally, the interest rates in the financial system is inversely proportional to the prices of the securities. That is if the interest rates increase, the prices of the securities decrease and the other way around. Indian debt markets have interest rate movement that makes it volatile which can lead to the massive price movements of money market securities.
A sponsor is somebody who usually initiates the process of setting up a mutual fund. The trust (fund) that he creates is done under the Indian Trust Act. It is then followed by the setting up of an Asset management Company (AMC) by the Trust. The members of the trust, called the Trustees are wholly responsible for safeguarding the interests of the investors of that firm and make sure the firm operates well within the rules and regulations and also comply with the relevant laws. The fund is put into place only after the approval of the market regulator, which is the Securities and Exchange Board of India.
There is an Asser Management Company associated with every mutual fund. It overlooks the maintenance and operation of the investments for the many different programs and schemes undertaken by the mutual fund. The performance of the AMC is further governed by the Trust. The AMC has many professionals employed to manage the investments and funds. AMCs are, at the end of the day, obliged to make any kind of investments only in compliance with SEBI regulations.