Do you know what is mutual fund? Let’s know about it more in detail! Mutual fund is a financial intermediary which invests the funds in a large variety of securities and shares after collecting the funds from various individual investors. The individual investors own a claim of assets which are created by the mutual fund investment company.
The invetors invest in units of mutual funds and become a part owner of the asset of mutual funds. The collected funds are invested and managed by the professional experts and investment consultants in different stocks, bonds, and other securities so as to meet the main objective and purpose of the investors.
The total income generated on these investments, either through capital gain or dividend or interest is divided among the unit holders and individual investors in proportion to the units held by them. The mutual fund company charges a fee from individual investors for managing, investing and administering the funds.
In India, it is mandatory for mutual fund companies to get themselves registered with the Securities and Exchange Board of India (SEBI).
Indirect Mode of Investment
The process of investing through mutual funds is known as Indirect Mode of Investing. This is because simply the money which is invested in any mutual fund scheme by an individual investor are further invested in various financial assets such as equitiess, debentures, government bonds, etc,. Direct mode of investment is the type of investment in which an investor directly allocates his funds in different securities or financial assets according to his own financial education and knowledge.
Advantages of Investing in Mutual Funds
There are a number of benefits or advantages of investing in mutual funds are discussed below :-
The most important advantage of investing in mutual funds is that the services of highly experienced and skilled professionals are availed. These professionals take their decisions after a dedicated and deep research about the performance and working of the company.
Investors can enjoy the benefit of diversification by only investing in MFs with a small amount of money and less risk. However, it must be noted that sectoral funds such as IT funds, Pharma funds, etc, may not provide the benefit of diversification as mutual funds of sectoral schemes deal in a particular sector.
Mutual funds are relatively less costly in comparison to direct investing. Indirect investing through mutual funds provides the advantage of scale in brokerage, custodial charges and other fees. All these benefits translate into lower cost for investors.
Mutual funds provide a higher return in the medium and long term as money is invested in a wide range of securities which a small investor is incapable of achieving.
The funds invested in open ended schemes of MFs, investors can sell their units instantly at the prevailing NAV and in close ended schemes , investors can sell their units on a stock exchange at the prevailing market price.
Disadvantages of Investing in Mutual Funds
Everything has cons with its pros, so does investing in mutual funds. The limitations are mentioned below :-
NO CONTROL OVER FUNDS
Mutual funds are an indirect mode of investment so, the investors have no right to say in the selection of securities. They are unable to select the securities in which they are willing to invest in.
RELIANCE ON FUND MANAGERS
Investors have to completely rely on the capability and competence of fund managers. If the manager’s pay is linked with the performance of the funds then in the greed of earning more, they may go for small term goals ignoring the long term ones. There is always a possibility that mutual funds to deviate from its main objective and serve the interest of its management.
HIGH MANAGEMENT FEES
Sometimes, MFs charge high management fees in order to pay higher compensation to their fund managers. Hence, these management expenses and load expenses reduce the return available to the investors.
There are many mutual fund schemes, especially tax saving schemes that have a strict lock-in period. The units of the mutual fund cannot be redeemed during the lock-in period. Hence, they become illiquid during that tenure.