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Mutual Fund Premier: Part I - An Introduction

 

 

What is a Mutual Fund?

 

A Mutual Fund is a trust registered with the Securities and Exchange Board of India (SEBI), which pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. This pooled income is professionally managed on behalf of the unit-holders, and each investor holds a proportion of the portfolio i.e. entitled not only to profits when the securities are sold, but also subject to any losses in value as well.

 

Why should I choose to Invest in Mutual Fund

 

For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:

·  Mutual Funds provide the benefit of cheap access to expensive stocks.

·  Mutual funds diversify the risk of the investor by investing in a basket of assets.

·  A team of professional fund managers manages them with in-depth research inputs from investment analysts.

·  Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.

 

Concept of Mutual Fund  - How Mutual Fund operates

 

The following chart gives us operational flow of a Mutual Fund

 

 

Entities Involved in Mutual Fund

 

The following diagram illustrates various entities involved in the organizational structure of Mutual Fund

 

 

 

Advantages of Mutual Fund

 

·  Affordability

·  Professional Management

·  Diversification

·  Variety of Investment according to Financial status of the Investor

·  Return potential

·  Flexibility

·  Transparency

·  Tax Benefits

·  Liquidity

·  Clear – Cut regulations [SEBI]

 

Limitations of Mutual funds

 

Ø        No Control over Costs

Ø        Investor has to pay investment management fees as long as he remains in the fund.

Ø        No Tailor Made Portfolios

Ø        Investors who invest on their own can build their own portfolios of shares, bonds and other securities Investing through funds means he delegates this decision to fund managers

Ø        Managing Portfolio of Funds

Ø        Availability of large number of funds can actually mean too much of choice for the investor. He may again need advice on how to select a fund to achieve his objectives

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