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Important Tips: Comprehending Mutual Funds

The term Mutual Funds is in the air for quite some time as every time you open the TV there is an ad trying to tell about mutual funds and after that comes a thought about what exactly it is, this article is about Mutual Funds & how to invest in them wisely.

What is Mutual Fund?

Mutual fund is an investment vehicle made up of pool of money collected from many investors from for the purpose of investing in securities such as stocks, bonds, money market instruments, etc.

It gives small investors access to professionally managed portfolios, equities, bonds and each shareholder contributes proportion in the loss or gain of the fund.

How do Mutual funds work?

Mutual fund companies take money from the investing public and use that money to buy securities like stocks and bonds of the companies they have in their portfolio. The value of the company depends on the performance of the stocks and bonds it decides to buy.

Kinds of mutual funds

Mutual Funds are of different kinds representing the type of securities the mutual fund manager invests in:

 

  • Income funds

Income funds are name for their purpose: to provide current income on study basis. These funds invest primarily in government and high quality corporate debt, holding these bonds until maturity in order to provide interest streams. The audience of these funds consists of conservative investors and retirees because they produce a regular Income. Tax conscious investors may want to avoid these funds.

  • Balanced funds

These funds provide balanced mixture of safety, income and capital appreciation. The strategy of balanced funds to invest in a Portfolio of both fixed income and equities. A typical balanced fund will have a weighing of 60% equity and 40% fixed income.

  • Money market funds

The money market consists of safe or risk free short term debt instruments mostly Government treasury bills. This is a safe place for your money but also you won’t get any substantial Returns.

A typical return is a little more than the amount you would earn in a regular checking or savings account and a little less than the average of certificate of deposit.

  • Bond funds

Bond funds invest and actively trade in various types of bonds. Bond fund offer actively managed and seek to buy relatively undervalued bonds in order to sell them at a profit. These funds pay high returns then certificate of deposit and money market investments but Bond funds aren’t without risks.

  • Equity funds

They invest primarily in stock & represents the largest category of the mutual funds. Objective of this class of funds is long term capital growth.

  • Global or International Funds

An international fund invest only in assets located outside your home country while Global funds can invest anywhere in the world including within your home country it is tough to classify them at the risk care of safer than domestic investments.

  • Speciality funds

These type of mutual funds forgo diversification to concentrate on a certain segment of the economy or a target is a strategy. Sector funds are targeted strategy fund aimed at specific sectors of the economy such as Financial, Technology, health and so on. Regional funds make it easier to focus on a specific Geographic area of the world.

The advantage of these funds is that they make it easier to buy stock in foreign countries which can otherwise be difficult and expensive but you have to accept the high risk of loss which occurs at the region goes into bad recession. Socially responsible funds invest only in companies that meet the criteria of certain guidelines of beliefs.

  • Index funds

Passively managed funds that seek to replicate the performance of a broad market index. Investor might consider an index fund if the subscribe to the logic that most active portfolio managers cannot be the market on a regular basis.

  • Exchange traded funds

These investment vehicles pool investments and employ strategies consistent with mutual funds but they are investment trusts that are traded on stock exchanges, and have the added benefits of the features of the stocks.

Mutual fund fees

As nothing comes free, there are certain fees charged by the mutual funds that you must pay for them to let in the store. The annual fund operating fees are charged as an annual percentage of funds under management usually range from 1 to 3%. The share holding fees are to be paid directly by the shareholders whenever you decide to purchase of sell the funds.

Advantages in a mutual fund investment

  • Investor-oriented

Mutual Funds are attractive option for younger, novice and other individual investors who don’t want to actively manage their money and the fact that they provide high liquidity, diversification and good potential for growth makes them more invest worthy.

  • Easy management

They are run by managers who spend their days researching and devising investment strategies so they allow low cost way for small scale investors to experience benefit from professionally managed money.

  • Diversification

Biggest advantage of this investment because buying a single individual company stocks offer less diversification but diversified portfolio has securities and bonds of different companies so in this way buying through Mutual Fund allows investing in many companies at a single time.

  • Liquidity

This allows selling of mutual funds units on any day you want, unless they have a prespecified period, you can have your money anytime.

Disadvantages in mutual fund investment

  • Control over investment

Investors don’t have any kind of control over the investment as the fund manager decides what and when to invest in.

  • Risk and cost

The value of the mutual fund fluctuates according to the market condition most of the mutual fund companies charge operating fees and expenses associated with investing in mutual funds from investors.

  • Insurance

There is no insurance cover provided by any mutual fund company although the mutual funds are regulated by Security and Exchange Board of India, the investment is not insured against losses.

  • Single sector portfolio

Diversification provides good protection against loss of money but a company investing in a particular sector of industry is still at a high risk.

  • Lack of transparency

Mutual fund purpose isn’t always clear. The funds advertisement can get investors down the wrong path.

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By now you would have become familiar with how to use virtual funds. Mutual fund investment allows small investors to buy shares of the mutual fund that already holds hundreds of different securities thereby allowing diversification at a very low price. People can still learn a lot from other books and magazines but will probably just want to jump in and start investing them so good luck hunting.

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