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Meaning
What is Mutual Fund?
A mutual fund is a type of investment company that pools money from numerous individuals to create substantial sums that are then invested in stocks, bonds, shares, and other types of investment assets. An “asset management company” (AMC), usually referred to as the Mutual Fund Company manages the investments.
The investors receive a share of any income or gain from their investments. Mutual funds have the potential for high risk and high reward. Experts and professionals invest in mutual funds. Axis Mutual Funds, Kotak Mutual Funds, and others are a few mutual fund companies.
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History
History of Mutual fund
The only Mutual Fund Entity in India in 1964 was the Unit Trust of India. After that, banks, LIC, and GIC established 167 schemes and eight new funds. The overall value reached 6700 Crore in 1988. Foreign and private players enter the industry in 1993.
The Mutual Fund Regulation was created in 1996 by SEBI, the Securities and Exchange Board of India. This was the industry’s first regulatory framework for mutual funds. In 2014, roughly 45 mutual fund companies were operating in India, managing assets of close to 10 lakh crore rupees.
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Advantages
Advantages of Mutual Fund
- Easily Conversion into Cash
- Helps to Invest in smaller amount
- Diversification
- Easy to buy & Start
- Lower investment cost
Easily Conversion into Cash
The ability to withdraw money from a mutual fund at any moment is the biggest advantage of doing so. Due to the simplicity of converting mutual fund investment units into cash, liquidity is increased. An investor should also take into account any fees or penalties associated with the early withdrawal of funds.
Helps to Invest in Smaller Amounts
A mutual fund has a lot of flexibility. An investor doesn’t have to make a sizable first commitment. With a minimum investment of Rs 500, anyone can get started. With mutual funds, investing is simple.
Additionally, a SIP (Systematic Investment Plan) function allows anyone to invest a set amount on a monthly, quarterly, or annual basis. For someone who is paid a salary, this function is beneficial. An individual can make investments based on their financial situation, including their budget and income.
Diversification
To lessen the risk, diversification entails building a portfolio or investing in a variety of securities. When one investment loses money while another one makes money, the strategy is effective. Diversification is used by mutual fund firms to reduce overall investment risk and volatility.
Easy to Buy & Start
The ease of investing in mutual funds is one of the major benefits. People have the option of investing offline or online. Also accessible at any moment are people’s portfolios. Through intermediaries such as Brokerage Companies, Registrars, CAMS, and Online Mutual Fund Investment Platforms, an AMC makes the funds available and distributes them.
Lower investment cost
Lower investment charges are an additional advantage of investing with a mutual fund. This is because mutual fund companies buy assets in fewer transactions than individual investors do.
Furthermore, because the cost of the asset management services is shared by all the participants, the investment costs are reduced.
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Disadvantages
Disadvantages of Mutual Fund
- High Management Cost
- Dilution
- Fluctuating returns
- Lock-in Periods
High Management Cost
Some mutual funds come with hefty related costs. As was previously indicated, Experts administer and handle the mutual funds, therefore the mutual funds add expenses for things like fund management, manager salaries, and distribution costs. Depending on the fund, these fees could be sizable. In addition, mutual funds impose a significant exit load if you withdraw your money.
Dilution
Out of all the drawbacks, this is the biggest one. Diversification generally averages out all of your investments, protecting you from any significant losses while also preventing significant gains. Major gains so become lessened. People don’t invest in too many mutual funds because of this.
Fluctuating returns
Mutual funds don’t promise fixed returns. You should constantly be ready for any changes, including a decline in your mutual fund’s value. In other words, because investing in mutual funds is tied to the stock market, there are many return variations. Even experienced fund managers occasionally suffer enormous losses.
