Mutual funds are a good way to park your money and You can take an advantage of the stock market without doing any research on buying stocks yourself. With the guidance of a financial planner, you can pick the suitable stocks based on your risk appetite.
WHY INVEST IN MUTUAL FUNDS?
Mutual funds are a type of certified managed combined investment schemes that gathers money from many investors to buy securities. There is no such accurate definition of mutual funds, however the term is most commonly used for collective investment schemes that are regulated and available to the general public and open-ended in nature. Hedge funds are not considered as any type of mutual funds.
Mutual funds are identified by their principal investments. They are the 4th largest category of funds that are also known as money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds are also categorized as index based or actively managed.
The fund manager is also known as the fund sponsor or fund management company. The buying and selling of the fund’s investments in accordance with the fund’s investment is the objective. A fund manager has to be a registered mutual fund distributor. The same fund manager manages the funds and has the same brand name which is also known as a fund family or fund complex.
Mutual funds invest in various kinds of securities. The various types of securities that a particular fund may invest in are mentioned in the funds prospectus, which explain the fund’s investments objective, its approach and the permitted investments. The objective of the investment describes the kind of income that the fund is looking for. For e.g., a "capital appreciation" fund generally looks to earn most of its returns from the increase in prices of the securities it holds rather than from a dividend or the interest income. The approach of the investment describes the criteria that the fund manager may have used to select the investments for the fund.
The investment portfolio of a mutual fund’s investment is continuously monitored by the fund house portfolio manager or managers who are either employed by the fund’s manager or the sponsor.
Advantages of Mutual funds are:
- Increase in diversification.
- Liquidity on a daily basis.
- Professional investment management.
- Capacity to participate in investments that may be available only to larger investors.
- Convenience as well as service.
- Government oversight.
- Easier comparison
There are different types of Mutual funds as well. Here are some of them.
Open-end funds
In open-end mutual funds, one must be willing to buy back their shares from investors at the end of every business day at the net asset value that is calculated for that day. Most of the open-end funds also sell shares to the public on every business day. These shares are also priced at a particular net asset value. A professional investment manager will oversee the portfolio, while buying or selling securities whichever is appropriate. The total investment in the funds will be variable based on share buying, share redemption and fluctuation in market variation. There are also no legal limits on the number of shares that can be issued.
Close-end funds
Close-end funds generally issue shares to the public just once, when they are created via an initial public offering. These shares are then listed for trading on a stock exchange. Investors, who don't wish any longer to invest in the funds, cannot sell their shares back to the funds. Instead, they must sell their shares to another investor in the market as the price they may receive may be hugely different from its net asset value. It may be at a premium to net asset value (higher than the net asset value) or more commonly at a lesser to net asset value (lower than the net asset value). A professional investment manager will oversee the portfolio, in buying or selling securities, whichever is appropriate.