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Concept of Mutual Fund

What is Mutual Fund?

A MUTUAL fund is an organization that pools the savings of a number of investors called as unitholders who share a common goal. 

The capital market is information sensitive market. A small piece of information could lead to market fluctuations. A small investor may not be aware of such movement and fluctuation and as a result, he/she normally make a loss in the capital market. A retail investor can directly invest in the capital market or invest through a mutual fund.
Mutual Fund

A mutual fund is a perfect investment vehicle in today's complex financial scenario. Price changes in the financial assets are driven by so many events (i.e both national and international events). An ordinary investor is unlikely to have the knowledge, skills and time to understand the impact of these events and to act accordingly. It is also difficult for him to keep track of various investments. Investment in mutual funds takes care of all these problems.

The money collected is invested by the professional fund managers in different types of securities depending upon the objectives of the scheme. The return or loss on investment is shared by the unitholders. It is shared in the proportion to the number of units owned by them. A mutual fund offers an opportunity to invest in a diversified and professionally managed portfolio at a relatively low cost.


MUTUAL FUND SCHEMES

There are various types of mutual fund schemes as per the needs of investors of different age-groups, having different financial positions, risk tolerance and return expectations. Each scheme has a pre-determined objective. On the basis of their structure, all mutual fund schemes can be divided into 2 categories:

 (1) Open-ended: Under this scheme, the investor can make entry and exit at any time. These schemes do not have a definite redemption period (i.e maturity period). Investors can buy and sell units at the net asset value based price at any time. The basic feature of this type of scheme is liquidity.

(2) Close-ended: Under this scheme, the investor can invest their fund during the Initial Public Offering (IPO) or from stock market after the units have been listed. A close-ended scheme has a stipulated maturity period.





The significance of Mutual Fund.

Mutual funds are important segments of the financial market. They channelize the savings and invest in the financial market, mainly in capital market and money market. The ordinary investor has neither skill nor time to recognize the investment opportunity and act immediately. MFs, on their behalf, make use of investment opportunities to earn attractive returns. They provide a good balance of risk and return with different options to suit the various needs of various investors.


Benefits of investing through Mutual Fund
  • Professionally managed portfolio
  • Transparency
  • Diversified portfolio
  • Simplicity
  • Low cost of investment
  • Liquidity

However, the investors in the Mutual funds depend on the skill, experience, and analysis of professional managers. The returns on their investments depend on the fund manager's skill and judgment. Investors invest their money in the Mutual funds on the basis of the faith they have in some Mutual Fund Manager.

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Location: United States

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