Concept Of Mutual Funds : Advantages And Disadvantages Of Investing In Mutual Funds

Mutual Fund is one of the most popular investment destination in the financial industry. One should be aware of the advantages and disadvantages of mutual funds before investing in it. This article discuss the basic working of mutual funds in simple words.

Common investment schemes

Today, every people are conscious about their financial security and thereby ends up searching for various alternative source for improving their financial backbone. There are some people who would go and maintain a healthy saving accounts in a bank while some others are smart enough to consider the opportunities to invest their savings to secure a quick rise in their gross income. When we speak about investment, one thing that normally comes to our mind is that of the stock market and also one of the most publicised term i.e. the mutual fund. Almost all the common people are already aware of the existence of the mutual funds but may not quite get hold of the various aspects involved in this popular investment instrument. Almost all the terms and facts that are mentioned in the various publicity documents or service brochures may seem to contain jargon which are meant for business geeks and not within the understandable standard of the common man. So, what really is a Mutual fund, is it what smart people collects as the gainful investments and draws bagful of returns out of their investment? Probably, the answer for this query would be 'NO' in legal sense of the term. Mutual funds is not all about investment and profitable returns, it can also go other way round and one may simply end up giving away bundles of cash and wasting all their hard earned money for nothing useful as such. So, what can be assumed here is that simply having the term 'Guaranteed Returns' in the publicity banner need not necessarily mean it is capable to deliver. Hence, every investment whether it be through a mutual fund or direct stock market investments must be proceeded only after having clear idea of how things work in this complex world of Business and Financial investments.

What is a Mutual fund?

Mutual Fund is nothing but a mode of investment dealing with the stocks and bonds. It can be thought of as a financial body which constitutes experts in dealing with investment and they take up the task of investing the people's money on stocks, bonds and other investments on their behalf. Therefore all the investors will have their share which are equivalent to the holding of the fund. There are many different ways of earning through a mutual fund. One can make money from the dividends of the stocks and also from the various interests on the bonds. In case of securities which are sold and has increased in price over time, the fund will have a capital gain which are generally passed to the investors. Additionally, if there is an increase in the price of the fund and the same is not sold out by the fund manager, then there will also be increase in the price of the shares of the fund which can later be sold and exchange for profit. Generally, there will be two options while collecting profits from mutual fund which is to either opt for a cheque for distribution or otherwise reinvest it further to have more shares under one's account.

Advantages of Mutual fund

Mutual funds are a good place to invest as because the hard earned money that one invest to buy funds will be managed by some expert hands. Most of people do not have the expertise to keep and maintain their own portfolio and hence seeking the help of professional management in dealing with the investments will always be considered good and beneficial. Investing money on shares, stocks and bonds demands an investor to monitor their investments on a regular note and hence in most cases where an individual cannot sacrifice such amount of time for these undertakings may need to take the help of a full-time manger to do it on his behalf. Mutual fund also scores high due to the characteristics of diversification prevalent in the system. It will always be more safe to spread out the risk by owning shares in mutual fund rather than to invest on individual stocks and bonds. Since, mutual funds invest on a wide number of assets it is very unlikely to cause any significant loss as the same is equally normalized by the gains on other assets. In other words, the phrase 'the more the better' holds quite good in this scenario prevailing in the mutual funds investment. Some other benefits or positive aspects of mutual fund is that of the liquidity and economy of scale. Since Mutual funds deals with a very large amount of securities, the transaction costs involved with the security is much less than what would have been the case for individual investors. As already said, liquidity is something that every investors would prefer and Mutual Fund rightfully delivers in this regard by allowing the individual shares to be turned to cash at any desired time.

Disadvantages of Mutual fund

There are some concerns regarding the proper management of the funds as has been raised by many investors. Since, it is the investors money that the management ventures and plays around, there are always some degree of doubt in their mind regarding the commitment of the management experts as whatever be the outcome of the funds, they are never at a loss and are paid for whatever result may come up. Moreover, mutual fund companies passes on various charges and service taxes on the investors to cope up with the costs maintained to run the various administrations of the company. Even though these costs are negligible and quite unnoticed by the investors, they may pose to be a negative impact in the long term for many investors if the same is not realized and taken care of. Since mutual funds depends on diversifications, it may sometimes turn out to be on the downside when the high returns do not meet the proportion to that of the lower ones and thereby negatively affects the gross return. There are also many taxes which are levied on the capital gains when the fund manager sells the security. Therefore, for the investors who are always concerned with the tax liabilities must keep a note of such conditions. Investing on too many tax-sensitive funds or otherwise holding a non tax-sensitive fund into a tax-deferred account may also call for tax liability on the mutual fund investment.

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Author: Mohamed Salim08 Jan 2011 Member Level: Gold   Points : 1

The disadvantages of Mutual fund investing is a big concern of investors.Because of the various taxes and poor fund management would erode your profits.If not careful about it the purpose of additional income become a dream only.

Author: DHRUBA31 Mar 2015 Member Level: Gold   Points : 3

Yes, a good elaboration about Mutual fund and to invest with it. Quality of the fund/Assets management company is the vital point for best return.But there are various right of the Investors Investing with the fund and those right is very much important to the Investors like:
1.Unit holders have a proportionate right in beneficial ownership of the scheme assets as well as any dividend or income declared under the scheme .

2.They have the right to information regarding any adverse happening.

3.They are entitled to received dividend warrant with in 42 days of the date of dividend declaration.

4. AMC can be terminate by 75%of the unit holders of the scheme present and voting at a special meeting.

5.The holders have the right to inspect major documents of the fund i.e. material contract, the investment management agreement, the custodian services agreement, registrar and transfer agencies agreement, memorandum and articles of association of the AMC , recent audited financial statements and the offer documents of the scheme.

6.With the consent of 75% of the unit holders they have the right to approve any changes in the close ended scheme.

7.Every unit holder have the right to received a copy of the annual statement and periodic statement regarding his transactions.
To take appropriate decision the Investors can apply their power.
Thanks for such an excellent Resource.

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