WHY MUTUAL FUNDS ?
A mutual fund is simply an investment vehicle that allows a group of investors to pool their money together with a predetermined investment strategy. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don’t have to figure out which stocks to buy).
By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification.
The Mutual Fund Advantage
It seems strange to compare mutual funds to stocks since mutual funds are primarily composed of stocks, but it is important to distinguish the two because there are some notable advantages to using mutual funds.
Investing in individual stocks can be fun because each company has a unique story. However, it is important for people to focus on making money. Investing isn’t a game. Your financial future depends on where you put you hard earned savings and it shouldn’t be taken lightly.
There is no greater advantage to using mutual funds than diversification. Do you honestly believe wealthy investors purchase just a couple of stocks? Of course not! If they are not using mutual funds (many do), than they are purchasing a large number of stocks.
Mutual funds are excellent for the new investors because you can invest small amounts of money and you can invest at regular intervals with no trading costs. However, investment of the same amount directly in stocks or bonds will be very difficult since this requires investment of significantly larger sums of money.
Wealthy stock investors get special treatment from brokers and wealthy bank account holders get special treatment from the banks, but mutual funds are non-discriminatory. It doesn’t matter whether you have Rs.5, 000 or Rs.5, 000,000; you are getting the exact same manager, the same account access and the same investment.
In general, mutual funds carry much lower risk than stocks. This is primarily due to diversification (as mentioned above). Certain mutual funds can be riskier than individual stocks, but you have to go out of your way to find them.
With stocks, one worry is that the company you are investing in goes bankrupt. With mutual funds, that chance is next to nil. Since mutual funds typically hold anywhere from 25-5000 companies, all of the companies that it holds would have to go bankrupt.
We dont (don’t) argue that you shouldn’t ever invest in individual stocks, but we do hope you see the advantages of using mutual funds and make the right choice for the money that you really care about.
By purchasing mutual funds, you are essentially hiring a professional manager at an especially inexpensive price. It would be a bit cocky to think that you know more than a mutual fund manager. These managers have been around the industry for a long time and have the academic credentials to back it up. Saying you could outperform a mutual fund manager is similar to a football fan sitting on their (his) couch saying “I could have made that catch” -possible, but not likely.
Even if some of us are better at picking stocks than a professional and their support staff, most of us would not want to spend the amount of time it takes to watch, research and trade the market on a daily basis.
By pooling investors’ monies together, mutual fund companies can take advantage of economies of scale. With large sums of money to invest, they often trade commission-free and have personal contacts at the brokerage firms.
If you find yourself in need of money in a short amount of time, mutual funds are highly liquid. Simply put in your order during the day and when the market closes a check will be sent to you or you can have it wired to a bank account. Stocks can be much more difficult depending on what kinds (kind) of stocks you are (have) invested in. CD’s offer no liquidity (not without a hefty fee) and bonds can be difficult, too. Some mutual funds also carry check writing privileges, which means you can actually write checks from the account, similar to your checking account at the bank.
Ease of Use
Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The bookkeeping duties involved with stocks are much more complicated than owning a mutual fund. If you are doing your own taxes, or are short on time, this can be a big deal.
Definition: The Net Asset Value, or NAV, is simply a measure of the current rupee value of one unit of a mutual fund. It’s the fund’s assets minus its liabilities divided by the number of outstanding shares.
NAVs are calculated at the end of each trading day. If the NAV increases, then it means the value of your holdings increase (if you are a shareholder).
The best way to buy mutual funds is to go straight to the source. Asset Management Companies (AMCs) have no hidden agendas – they exist to serve their customers.
Sometimes parting with a mutual fund can be a difficult task. Other times it can be quite easy. More often than not, investors tend to sell their mutual fund holdings for the wrong reasons. So before you make a hasty decision, please see the following list of the correct reasons to sell a mutual fund investment:
- You need the money
- Your situation has changed
- The fund has changed its style or objective
- The fund is underperforming
- The fund manager has changed
- The fund size has changed
- The fund’s expense ratio rises
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. These mutual funds schemes disclose NAV generally on daily basis.
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
A Load is a sales charge assessed by some funds.
Also Known As: loaded fund, sales charge, back-end load, front-end load, loaded mutual fund, class A, Class B, Class C.