Monday, January 01, 2007

Why Choose Mutual Funds?

If you are looking for a good investment "story", buy a stock. If you are looking for a smart investment, buy Mutual Funds. Strange as it may seem (since Mutual Funds are primarily composed of stocks) such a distinction succinctly underlines the fact that there are some notable advantages to using Mutual Funds.

Professional Management

When you buy a mutual fund, you are enlisting professional help at an especially inexpensive price. Mutual fund managers choose securities to buy or sell based on their years of experience in the markets and on research specific to individual stocks, in keeping with a mutual fund's objective as stated in the Prospectus. Therefore, instead of you making decisions based on gut-feel or what someone told you, you simply leave your investments in the expert hands of professional fund managers, who invest your money on the basis of minute analysis and astute investment strategies. The convenience of mutual funds is undeniable - you don't have to micromanage the portfolio yourself . You save your time, besides not having to time the market.

Diversification

To achieve a truly diversified portfolio, you may have to buy stocks with different capitalizations from different industries and bonds having varying maturities from different issuers. For the individual investor this can be quite costly. This is where Mutual Funds pitch in. Spreading fund assets among different investment vehicles, and different stocks in a variety of industries with different rates of return, helps offset losses in one investment with gains in another. To diffuse your risk while increasing your potential for return, choose a variety of well-performing funds with different objectives and different investments.

Economies of Scale

Mutual funds are able to take advantage of their buying and selling size, thereby, reducing transaction costs for you. In addition, the low cost per individual can be attributed to the cost of trades being spread over all investors in the fund.

Affordability - A better portfolio for less money
The minimum initial investment for a Mutual Fund is fairly low for most funds (as low as Rs 500
for some schemes). Investors individually may lack sufficient funds to invest in high-grade stocks. Say you want to invest Rs.5000 in a top notch software company. You find that it is not enough to buy even one share! If you invest that same Rs.5000 in an Information Technology Mutual Fund, you get yourself a proportionate share in a large number of premium software scrips!

Impartiality

Wealthy stock investors get special treatment from brokers and wealthy bank account holders get special treatment from the banks, but mutual funds are non-discriminatory. It doesn't matter whether you have Rs. 500 or Rs. 5,00,000, you are getting the same manager, the same account access and the same investment.

Liquidity

You can sell your Mutual Funds on any Business day and receive your current market value of investments within a short period of time (3 to 5 days) thus maintaining immediate access to capital.

Transparency

Two key documents - the Prospectus (legal document) and shareholder reports (normally quarterly) highlight the fund’s strategy and performance. You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

Choice of Schemes and Flexibility

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. You determine your own needs and risk tolerance and then choose a mutual fund that fits your financial goals. You can transfer a part or all your investment from one fund to another when your goals change over time.

Well Regulated
All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the your interests as investors.

As with any investment, there are risks involved in buying mutual funds. These investment vehicles can experience market fluctuations and sometimes provide returns below the overall market. Mutual fund returns are not guaranteed. Also, the advantages gained from mutual funds are not free: many of them carry loads, annual expense fees and penalties for early withdrawal.
To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolio as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous.If we cautiously approach these caveats, the advantages far outweigh the disadvantages and elevate Mutual Funds to the status of a preferred investment vehicle.

2 comments:

pugazhanthi said...

How do we select a "professional" who will take care of our investments.

Since now a days there are lots of Banking companies are comming up with Mutual funds, how do we select a person i mean a "professional" in this day to day work(mutual fund) monitoring activities on the fund flow on present market startegy.

Mutual Funds said...

At the outset, answer this question, ”Am I comfortable with brand names or independents?”
As you begin your search for an investment professional, there will be big names that crop up. They can be impersonal and corporate mandates can drive sales of proprietary products. Conversely, independent financial professionals, who are self-employed and unaffiliated with major companies, are unencumbered by corporate policies and may have more flexibility in terms of their product offerings.

Given below are the basic screening parameters to choose an investment professional
• product basket offered
• educational qualifications, specific areas of study and professional licenses to provide services
• work history and experience with clients
• resources in terms of research and support
• frequency of intimation of portfolio holdings and its performance
• policy of ensuring fair dealing for clients, handling of grievances and arbitration matters
• maintenance of client confidentiality
• fees charged
• client references
While a financial professional may have all the right qualifications and expertise on paper, it is important to have a personal connection. You need to select someone you can be honest with and respect.