Before studying the benefits of mutual funds it is very important to know that what actually mutual funds are. Mutual fund is a sort of professionally managed collective investment which is professionally managed and which pools the money from investors to buy stocks, bonds and securities. Now day’s mutual funds are becoming very popular among investors who have very limited money, time and knowledge. It has become a very good vehicle for investment.
There are different kinds of mutual funds. Open end mutual fund is mutual fund in which company is willing to buy their shares back from the investors. And these shares are bought back at the end of each and every single business day which is valued at the net asset value. Second type of mutual fund is close end funds. In close end mutual funds, shares are issued for public purchase once at the time of their creation through an IPO. And if the investor wants to discontinue his investment in fund then he can only sell his shares to any other investor in open market. He cannot sell back shares to the fund. Third type of mutual fund is unit investment trust in which shares are issued to public once at the time of its creation. They can either sell their shares in open market or can redeem their shares with the fund directly. Fourth type of mutual fund is exchange traded funds which have the characteristics of open end funds and close end funds.
Professional analysts help thousands of investors to pool money and provide them with results in current market scenario where common man gets perplexed. A mutual fund helps an investor to bifurcate his money into diversified portfolio at very low cost. While if he has to create his own portfolio of diversified stocks he has to pay a huge amount for that. When an investor invest in a diversified portfolio his risk gets limited as a reduction in price of any two-three securities in a portfolio that will hardly bother him. Mutual fund creates an interest in investors mind due to its quality of diversification in investment. Regular reports regarding mutual funds is received by shareholders. Daily newspapers also give the mutual fund prices list or the price list can be seen directly from internet also. Mutual funds can also be purchased on margins, in this investor has to borrow money from broker or bank and repay them the money with interest.
Internet provides an investor with fastest and reliable way to access the information regarding the mutual funds. Mutual fund business can easily be conducted through a mobile phone or mail. Investors who are very active and smart in managing their diversified portfolios can make good money through mutual funds. Mutual funds can be redeemed into cash anytime as per the requirement of the investor with the help of just conveying a small message through letter or phone. Through mutual fund a common man can set continuous source of monthly income as mutual funds provide us with huge amount of dividend. An investor is on the safer side when he invests his money in mutual funds. An investor has to keep a record of all the dividends purchases interest rates and their short term or long term losses or benefits. In earning dividend an investor has an option to collect his dividend in cash or he can reinvest it and it will get compounded which will result in huge amount of money after some long time period. The fund manager who provides investor with diversified portfolio of stocks is paid management fee for his financial advisory. Brokerage commissions are included while purchasing mutual funds the fees of the transaction is directly related to the turnover.
As we know that all the investments bear risk, similarly there is risk in investing in mutual funds too. Investing in mutual fund bear risk of market fluctuations and can provide us with returns which is very less. And the advantages which are gained from investment in mutual fund are not also freely available for them as they carry many expenses like distribution expenses, sales charge, management fee and many other expenses. So investment in mutual fund should be done wisely after proper research.