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Mutual Funds India

>> Mutual Funds India

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. Hedge funds are not mutual funds; they cannot be sold to the general public and are subject to different government regulations. They are generally the most common investment vehicle for retirement plans, such as the 401(k) in the United States.

Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. The main advantage of mutual funds is they provide stock diversification and professional investors managing the account. The main disadvantage is the fees/expenses charged.

There are three structures of mutual funds: open-end funds, unit investment trusts, and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange such as the New York Stock Exchange. Open-end funds that cannot be sold on an exchange can instead be sold back to the fund manager at the close of each business day.

Mutual funds are generally classified by their principal investment strategy: money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds. Funds may also be categorized as index funds, which are passively managed funds that match the performance of an index or actively managed funds, that try to beat other indexes but charge higher fees.

Investors in a mutual fund must pay mutual fund fees and expenses, which reduce the fund's returns and performance and are usually expressed in the form of an expense ratio. Passively managed funds, such as index funds generally have a lower expense ratio than actively managed funds.

Mutual funds may invest in many kinds of securities. The types of securities that a particular fund may invest in are set forth in the fund's prospectus, a legal document which describes the fund's investment objective, investment approach and permitted investments. The investment objective describes the type of income that the fund seeks. For example, a capital appreciation fund generally looks to earn most of its returns from increases in the prices of the securities it holds, rather than from dividend or interest income. The investment approach describes the criteria that the fund manager uses to select investments for the fund.

A mutual fund's investment portfolio is continually monitored by the fund's portfolio manager or managers.

Advantages and disadvantages to investors

Mutual funds have advantages and disadvantages over investing directly in individual securities as follows:

Advantages of investing in mutual funds

  • Increased diversification: A fund normally holds many securities; diversification decreases risk.
  • Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at the close of every trading day at a price equal to the closing net asset value of the fund's holdings.
  • Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund's investments.
  • Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets.
  • Service and convenience: Funds often provide services such as check writing.
  • Government oversight: Mutual funds are regulated by a governmental body
  • Ease of comparison: All mutual funds are required to report the same information to investors, which makes them easy to compare.

Disadvantages of investing in mutual funds:

  • Subject to mutual fund fees and expenses
  • Less control over timing of recognition of gains
  • Less predictable income
  • No opportunity to customize

Source: Wikipedia