Before taking a step further regard Mutual funds, one has to know the terminology, the evolution, it’s key features, advantages and disadvantages (pros and cons) associated and types of mutual funds etc. So let’s begin by entering into key area of knowing what a Mutual Fund is. As terminology speaks about itself, it is “A kind of collective investment allowing it’s investor to pool individual investments given to a fund manager who also invests money in line with objective of investors”. Thus in general a Mutual fund comprise of following constituents like Sponsor-one who create mutual funds, Trustee-one who manage and control trust of investors as well as the companies dealing with it, Registrars, brokers, financial advisors as well as those of custodian viz who safeguards trust’s money and securities. The term Mutual funds first came into foray in the year 1924 in USA. In India, regulated by SEBI (Securities Exchange Board of India), it was introduced in 1992, though revolutionised in year 1964 itself. Let’s now check the key features of Mutual funds which are as shown:
- The biggest asset of the mutual fund is it involves huge retail participation thus bringing more foreign revenues and cross-border trades etc.
- Easy and efficient tool for record keeping of account statements.
- Allows switching of funds between Equity to debt and vice-versa which proves as a effective channelized method in rebalance investment from time to time.
- Helps minimizing value erosion of the vested property or investment.
- Transparency in industrial trade and standards.
- Getting higher returns compared to normal interest rates offered by bank as very effective debt management tool is managed.
- Set under the principle of helping even smallest of investor with objective of wealth maximisation, it gives benefits of even investing in smallest of amounts, however getting good returns based on market conditions.
- Helps maintaining good liquid reserves and pool for surplus, so as to maintain good conditions in foreign market thereby curbing inflation and making country economically proficient.
- Also helps diversification and strategies for enhance foreign direct investment, so as to maintain ties and trade standards within countries.
However the prima facie evidence of disadvantages of mutual funds also cannot be ignored. These are:
ü High on returns in pretext of high cumulative fees charged by the companies.
ü Some plans of mutual funds are market related and thus risk associated in such cases to lose invested money is much higher.
Last but not the least, mutual funds still adopts to age old tradition built in US and are widely classified as Open, Closed end and Unit Investment funds. Of which Open and closed end funds depends on shares based on net asset value and also based on initial offering for public based on companies strategy and their position in market. Unit linked plans are almost extinct, however in this case an investor can redeem shares directly with the fund at any time, as unlikely in case of other mutual funds. Thus they act largely as great financial regulators based on principle of maximisation of returns based on net value invested.