A mutual fund is a professionally managed investment scheme made up of a pool of money collected from several investors who are ready to invest in stocks, bonds, money market instruments, and other assets. Like several other investment portfolios, Mutual funds are also subject to market risk and investors are advised to read the documents before they opt for one.
The mutual fund spreads risk among multiple investments. But, funds rise and fall along with the stock market. Each fund has a performance record, making it easy to compare one fund and one sector with another for the performance and returns gained.
How Mutual Funds Work?
Mutual funds are operated by professional money managers, who are responsible for allocating the funds in order to make a capital gain from the fund invested.
As an investor, you can buy mutual fund units, which represent your share of holdings in a particular scheme. These units you purchase can be redeemed as needed at the fund’s current net asset value (NAV). However, the NAVs keep fluctuating according to the market and fund’s holdings. So in order to make a profit, it is important to invest after properly analysing the scheme.
However, Mutual fund investment has advantages and disadvantages both as compared to that of direct investing in individual securities.
The Advantages of Mutual Funds include:
- Economies of scale
- Superior diversification
- Flexible Investment
- Fair pricing
- Advanced portfolio (professional) management.
The Disadvantages of Mutual Funds include:
- Tax inefficiency
- Lock-in period
- Fluctuating Returns
- Poor trade execution.
- high expense ratios
- Needs research
Key Highlights of Mutual Funds
- A mutual fund is an investment scheme that offers you to invest in stocks, bonds, or other securities.
- Through Mutual funds, you get access to diversified, professionally managed portfolios.
- Mutual funds are divided into different categories, depending upon the kinds of securities one wants to invest in, investment objectives, and based on returns offered.
- When investing in Mutual funds you need to pay annual fees (expense ratios) and commissions*(not in all schemes).
Factors to consider before you decide to invest in Mutual Funds
Investment objective – Speculation target alludes to a speculator’s monetary objective which he/she plans to achieve with the investment made. The objective made should be on the basis of long term and short term goals that he/she wants to accomplish in the future.
Time Horizon – Time horizon basically known as a time period refers to the time span for which an investor wants to keep his/her money invested in mutual funds. However, this directly depends on the investment objective. Mutual funds offer both long and short term investment options which range from one day to a maximum of five years. Well, if you want to make good returns, long term investment is the best.
Risk Tolerance – As discussed above mutual funds are subject to market risk hence before you invest it’s important to know the possible risk factors involved. In a general mutual fund, risk has been categorized in 5 risk levels which are – low, moderately low, moderate, moderately high, and high.
Fund Size – The factor which influences the performance of a fund is its size. A larger fund size requires more skills as increasing the fund size would mean increasing the responsibility and onus against its investors. Basically, the fund size has a finite limit and a poorly managed large fund is not a good choice.
Mutual fund Return analysis
Though the Mutual fund investments are subject to market risks still the returns can be estimated reasonably. This can be done through a mutual fund return calculator. Using this calculator is simple and you can estimate the returns offered by your investment yearly, total return, point to point return, and rolling return. The mutual fund return calculator can be found online on the portals of different mutual fund companies.