Question

- - what are mutual finds? types of mutal fonds? pros and cons of mutal find

Answer 1

Answer:

Mutual Funds (MF) are pools of financial assets like shares, bonds etc collectively owned by several investors who own units (shares) of the fund. Mutual Funds are floated by professional bodies who have vast experience and expertise in managing investments forming part of the funds like shares etc. The amount is collected from individual investors by selling units to them. This amount is then invested in the financial assets as per the terms of issue of units. The Promoter of MF then manages this vast pool, on behalf of the individual investors who have contributed to the corpus of the fund. Income derived from this investment is passed on to the individual investors, in the proportion of their investment in the fund (ie., number of shares/ units held).

Mutual Funds can be classified in different manners as follows:

1. Based on the nature of assets in which the fund is invested, like Equity Funds (investing in shares), Fixed Income funds (investing in bonds and other debt instruments), Money Market Funds (Investing in short term money market instruments, mostly Government Securities), Index Funds, Hybrid Funds etc
2. Based on timing of income distribution-

1. Income funds which distributes income earned by the Fund, by way of periodical dividends
2. Growth funds which re-invest the income earned and accumulate during the term of the fund

       (c ) Based on term/ nature of redemption-

1. Close ended funds which have pre-determined term after which the units will be compulsorily redeemed.
2.     Open ended funds which have no specified term and are perpetual in nature. Investors can enter and exit the fund any time, at the prevailing rate based on the net asset value (NAV)

Advantages (Pros) of Mutual Funds:

1. Professional management of funds by experts while the individual investors might not possess that skill.
2. Advantage of large scale operations with lower transaction costs
3. Portfolio effect- investment in different assets and the benefits (or losses) shared among the individual investors collectively
4. Availability of different types of products for individual investors
5. Investment discipline- regulated by Government Agencies

Limitations (Cons) of Mutual Funds:

1. Cost of investment- The MFs charge high fees and commissions for their service
2. Difficult to chose from among various Funds promoted by various companies. Often, the selection is based on past performance only, rather than the future prospects
3. Difficulty in ascertaining the composition of assets invested in frequently. However, now-a-days, more frequent disclosures have been made mandatory in various countries.