Mutual Funds: Concept and Objectives

Mutual fund is a financial instrument which draws money from a plethora of investors. This common fund is created with mutual contribution of multiple investors in a variety of assets and securities including debts, equities, government securities, liquid assets like funds, bonds, and others. Since all the gains, rewards, risks, profits, and losses resulting from or pertaining to this type of fund is shared by all the contributors according to their investment proportion, it is named as a mutual fund.

In other words, a mutual fund can be described as a trust having its own sponsors. Such funds are registered with Securities Exchange Board of India (SEBI) that is responsible for approving the Asset Management Company (AMC) that manages the fund. The trustees ensure that the fund is compliant with all the regulations set by SEBI.

Advantages of Investing Mutual Funds

  • Increased diversification: A fund diversifies holding many securities; this diversification decreases risk.
  • Daily liquidity: Shareholders of open-end funds and unit investment trusts may sell their holdings back to the fund at regular intervals at a price equal to the net asset value of the fund’s holdings. Most funds allow investors to redeem in this way at the close of every trading day.
  • Professional investment management: Open-and closed-end funds hire portfolio managers to supervise the fund’s investments.
  • Ability to participate in investments that may be available only to larger investors. For example, individual investors often find it difficult to invest directly in foreign markets.
  • Service and convenience: Funds often provide services such as check writing.
  • Government oversight: Mutual funds are regulated by a governmental body
  • Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare.

Disadvantages of Mutual Fund

  • Fees
  • Less control over timing of recognition of gains
  • Less predictable income
  • No opportunity to customize.