Mutual fund is an institution which pools money from different entities, which share common financial objectives, and invest the accumulated sum into asset classes that are suited to their stated financial objective of the scheme. One important factor which differentiates mutual funds from any other investment option is that the fund under any circumstances cannot deviate from the stated objective. This precisely forms the basis on which an investor invests his/her money in a given scheme.
All mutual funds are managed by a fund manager who is an expert in investment management. The fund manager does his necessary research and using his investment management skills makes sure that the return which he gains out of the fund is a tad more if, the investor would have managed the fund on his own. The incomes earned and the capital appreciation on the investment is trickled down to the investors, sometimes known as unit holders, in the proportion of their units held. This means that whenever an investor subscribes for units of any types of mutual funds, he/she becomes part owner of the fund in exactly the same proportion; as their contribution amount invested in the total amount of the fund. Mutual fund holders in India are also sometimes called as unit holder or mutual fund shareholder.
Some of the advantages of investing in a mutual fund
· It provides a well-diversified portfolio of equities which facilitates the investor in his/her quest to maintain a diversified investment portfolio in order to mitigate the risk of market fluctuations.
· The fund is managed by experts who undertake various research works and have superior investment skills in comparison to an ordinary investor. This results into a better rate of return for the investor.
· The risk is significantly less when you have a diversified portfolio as against a portfolio which is undiversified.
· Due to the sheer economies of scale, the fee which the investor has to pay for his/her fund management services is minimal.
· The liquidity which the mutual funds have is far more than any securities.
Some of the disadvantages of investing in a mutual fund
· The investor does not have any say when it comes to payment of maintenance fee regardless of the performance of the fund.
· There is no such option as customized portfolios. The decision to invest in a particular venue is solely at the discretion of the fund manager and the investor has no right to intervene in the decision making.
· Lack of sufficient knowledge makes it very confusing and often time leads to bad decision while choosing a particular mutual fund out of the plethora of such schemes.
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