Mutual Fund: The Best Key For the Investment.
Mutual fund is a type of investment in which money from multiple investors is taken and utilized for making a diversified portfolio. This money and portfolio are managed by fund managers . Fund Managers look towards the investment on the behalf of the investors. Profit and loss are shared with the investor depending on their investment.
History of Mutual Fund
In the 18th century, this trust was formed and they were taking money from investors and were giving fixed income to them. The Modern Mutual Fund industry was formed in 1924 named the Massachusetts Investors’ Trust (MIT) established by MFS Investment Management. This was the first mutual fund which allowed investor to take return as per NAV and allowed investors to buy or sell their shares at the end-of-day Net Asset Value (NAV).
After the 1926 crash there was a rapid growth, this helped mutual fund investors to grow their wealth rapidly. In 1940, the US government wanted to make some rules to this industry, this led to the passing of the Investment Company Act of 1940.
As time decays many of the new mutual funds were launched and in various segments like bonds , shares , etc. In the 20th and 21st century many new technologies were introduced like computers, the internet , etc . It made investors access it easily. Manty countries accepted this industry and started their mutual funds.
Types of Funds
There are majorly 5 types of Mutual funds Equity Mutual Funds, Debt Mutual Funds, Hybrid (Balanced) Mutual Funds, Money Market Mutual Funds, Index Mutual Funds.
1 ) Equity Mutual : Funds Equity Mutual Funds invest in equity like stocks. Main goal is to invest for the long term and gain capital appreciation. Risk and returns depend on the movement of stocks.
2 ) Debt Mutual Fund : Debt Mutual Funds invest in fixed income securities like government bonds. Here are low risks as compared to equity.
3 ) Hybrid Mutual Funds : Hybrid Mutual Funds invest in equity as well as fixed income securities. This is a mix of equity and debt. Risk as well as returns become less because of investment in equity and fixed income securities.
4 ) Money Market Mutual Funds : This fund invests for the short term. These funds invest in highly liquid securities like treasury bills , commercial papers , etc. . These are low risk funds as well as it generates less returns as compared to Equity and debt funds.
5 ) Index Funds : Index funds invest in indexes like Nifty 50 , Sensex. These are low risk funds and money is invested for the long term.
Advantages of Mutual Funds :
1 ) Diversification : Mutual funds give opportunities to invest in diversified portfolios with less amount. As we cannot invest little amounts everywhere so through mutual funds we can invest in diversified portfolios in the NAV.
2 ) Professional management : As mutual funds are managed by professional fund managers, our money tends to be safe. The one who doesn’t have time and knowledge for investment for those mutual funds is the best option for investment.
3 ) Accessibility for small investors : As we have opportunities to invest with small amounts, every small investor can invest in it. Mutual funds give an opportunity for small investors to invest in it.
4 ) Liquidity : Liquidity is high in Mutual funds, so it becomes easier for buying and selling. Investors can withdraw their money when they need to. Mutual funds provide high liquidity for investors.
5 ) Automatic reinvestment : Mutual funds give opportunity to reinvestment of dividends and gains. No need to invest again for the investors as the dividends get reinvested in funds.
6 ) Education and research : Mutual funds provide educational materials as well as research papers for the investors. All details are kept in front of investors, so it becomes flexible for the investors.
Disadvantage of Mutual Funds
1 ) Fees and expenses : Some mutual funds charged some fees for the investors. Small investors may face problems with these fees but big investors may not get any problem as they have more returns as compared to small.
2 ) lack of control : As fund manager invest on our behalf, we have less control on our money. We can invest and withdraw our money, but cannot decide anything about investment. We need to check all objectives of mutual funds before investment.
3 ) Lack of transparency : Mutual funds need to give each and every report to the investor, if not then the investor will have a lack of transparency. Therefore, investors need to look at the performance of the mutual funds before investing.
4 ) Market risk : Like all investments, mutual funds are also subject to market risks. There is always volatility among our profit and loss. One should check risk ratio before investing.
5 ) Required more patience : As mutual funds invest for the long term; investors need to maintain patience for getting returns. Investor with patience only get higher returns in mutual funds
This was some information about mutual funds. Here is not an advice to invest or not to invest. No recommendation is given through this blog.