Best Article on Mutual funds
What are mutual funds?
A mutual fund is a institution that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt and helps retail customers to buy them in pieces. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates. It is an financial instrument which helps novice investors to invest in equities through experts.
Why to invest in mutual funds?
Mutual funds are a popular choice among investors because they generally offer the following features:
- Professional Management. The fund managers manage the mutual funds and do the research for you. They select the securities and monitor the performance.
- Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
- Affordable: Most mutual funds set a relatively low value for initial investment and subsequent purchases.
- Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.
Types of Mutual Funds
Risks Associated With Mutual Funds
Standard risk factors
- Mutual Fund Schemes are not guaranteed or assured return products.
- Investment in Mutual Fund Units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal.
- As the price / value / interest rates of the securities in which the Scheme invests fluctuates, the value of investment in a mutual fund Scheme may go up or down.
- In addition to the factors that affect the value of individual investments in the Scheme, the NAV of the Scheme may fluctuate with movements in the broader equity and bond markets and may be influenced by factors affecting capital and money markets in general, such as, but not limited to, changes in interest rates, currency exchange rates, changes in Government policies, taxation, political, economic or other developments and increased volatility in the stock and bond markets.
- Past performance does not guarantee future performance of any Mutual Fund Scheme.
Risk of losing money:
Investments in equity and equity related instruments involve a degree of risk and investors should not invest in the equity schemes unless they can afford to take the risk of possible loss of principal.
Price Risk:
Equity shares and equity related instruments are volatile and prone to price fluctuations on a daily basis.
Liquidity Risk for listed securities:
The liquidity of investments made in the equities may be restricted by trading volumes and settlement periods. Settlement periods may be extended significantly by unforeseen circumstances. While securities that are listed on the stock exchange carry lower liquidity risk, the ability to sell these investments is limited by the overall trading volume on the stock exchanges. The inability of a mutual fund to sell securities held in the portfolio could result in potential losses to the scheme, should there be a subsequent decline in the value of securities held in the scheme portfolio and may thus lead to the fund incurring losses till the security is finally sold.
Note that these are just a few examples of mutual funds, and there are many other types available in the market. It is important to carefully consider the investment objectives, risk profile, and other factors before choosing a mutual fund.
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