A mutual fund is a company which allows a group of individuals to pool their money for some objective. The objective is mainly to invest in a stock, bonds and other securities. Each investor gets their part in the form of unit in that mutual fund. In simple terms Mutual fund companies take fund from many investors and invest it in the securities on behalf of them. They transfer the profits made from the investments to the investors. They charge fees for their services.
Why invest? (Advantages) –
1) The main advantage is professional service. Many individuals do not have necessary knowledge to invest in the market or they don’t have time to analyze the market situation. Fund companies hire qualified professionals to manage the fund. They have required knowledge and the skill.
2) They buys and sells securities in bulk which saves the transaction cost. IF individual do lots of trade then all his profit will go in paying commissions.
3) They invest in many securities which diversify the risk. For exam. Some maintains the balance between Equity and Fixed Income. So even if equity market is not doing well then they at least have income from fixed income securities.
4) It is subject to government regulation which protects the safeguard of the investors.
5) Liquidity is another benefit. You can easily redeem the same.
6) Some of them have tax benefits under sec 80cc.
Why think before investing? (Disadvantages)-
1) Costly affair. Fund management fees may be unreasonable for the services rendered. There are many costs involved in it that some investors don’t even understand what they are charged for. One should always find the cost before investing in it.
2) The main feature of is diversification. But again due to excessive diversification investors don’t earn good amount of profit. Its like low risk low return.
3) Though some offer tax benefits, when fund manager sells the securities they have to pay the capital gain tax. Individual can avoid the capital gain tax liability.
4) Share in profit, share in loss. fund doesn’t come with a guarantee of a return.