MUTUAL FUND AS INVESTMENT TOOL :

Some People have money for investment and have intention to investment to equity but have not knowledge and time and on the other hand, investment companies or groups have to create platform to channelize risk of direct equity/bond/commodity and real estate whose have professional skill and set up to pool money within laws of respective countries. Pooling all these demand and supply sides together are the source of conceptualising fund or mutual fund.

A mutual fund is an investment vehicle that pools the money of hundreds or even millions of investors and uses it to buy securities—stocks, bonds or even gold or real estate. The pool is sliced into pieces like a pie and sold to various investors, who share in the gains, losses and expenses, according to the amount of their investment.

When you invest in a mutual fund, you own a share of the fund, making you a shareholder. Shares represent a portion of the holdings of the fund which is known as Net Asset Value or NAV. Mutual fund shares can be redeemed at any time for the current market value. The value of the shares is determined daily based on the total value of the fund divided by the number of shares purchased.

Advantages of Mutual Funds:

Professional Management : The primary advantage of mutaul fund (at least theoretically) is the professional management of your money. Mutual funds are managed by a team of professionals, which usually includes one mutual fund manager and several analysts. Presumably, professionals have more experience, knowledge, and information than the average investor when it comes to deciding which securities to buy and sell.  Investors purchase funds because they do not have the time or the expertise to manage their own portfolio.

Diversification : By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money. 

Low Cost : Mutual funds are able to keep transaction costs — that is, the costs associated with buying and selling securities — at a minimum because they benefit from reduced brokerage commissions for buying and selling large quantities of investments at a single time.

Liquidity : Just like an individual stock, a mutual fund allows you to request that your holding units be converted into cash at any time.

Choice : Mutual funds come in a wide variety of types. Some mutual funds invest exclusively in a particular sector (e.g. banking fund or pharma fund), while others might target growth opportunities in general. There are thousands of funds, and each has its own objectives and focus. The key is for you to find the mutual funds that most closely match your own particular investment objectives.

Low Investment Amount : Most mutual funds will allow you to buy into the fund with as little Rs.100.00 or Rs.500.00. You do not need to be exceptionally wealthy in order to invest in a mutual fund.

Transparency : Mutual funds provide investors with a prospectus, which details the expenses of operating the fund, the sales commission, if there is one, the securities held in the fund, investment objective, performance and financial history.

Track record : Established funds have a track record that you can examine. When you consider buying a stock, you need to do research to discover the financial outlook for the company. When you buy a fund, you are looking, instead, at the track record and outlook of the fund’s manager. What you want to see is a long, steady and consistent record of growth. You also want to find out if the fund has recently changed managers.

Tax Advantage : Equity Link Savings Schemes are come under Sec.80C of Income Tax Act for benefit of individual investor. Recently it has been increased to Rs.1,50,000.00.

Disadvantages of Mutual Funds:

Professional Management: Many investors debate over whether or not the so-called professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still takes his/her cut.

Costs : Mutual funds don't exist solely to make your life easier--all funds are in it for a profit. The mutual fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that it is difficult to find individual head of costs.

Dilution : It's possible to have too much diversification (this is explained in our article entitled "Are You Over-Diversified?"). Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. If a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund’s holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

Taxes : When making decisions about your money, fund managers don't consider your personal tax situation. You need financial advisor to find the best for you.

No Insurance :  Although, mutual funds are regulated by the government but there is no protection against losses. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible (although extremely unlikely) that you could even lose your entire investment.

Poor Performance : Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, like the SENSEX OR NIIFTY, and a growing number of critics now question whether or not professional money managers have better stock-picking capabilities than the average investor.

Loss of Control : The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This can make it difficult for you when trying to manage your portfolio. You also should remember that you are trusting someone else with your money when you invest in a mutual fund.

Inefficiency of Cash Reserves : Mutual funds usually maintain large cash reserves as protection against a large number of simultaneous withdrawals. Although this provides investors with liquidity, it means that some of the fund’s money is invested in cash instead of assets, which tends to lower the investor’s potential return.

Too Many Choices : The advantages and disadvantages listed above apply to mutual funds in general. However, there are over 45 mutual fund house and around 1000 schemes in operation, and these funds vary greatly according to investment objective, size, strategy, and style. Mutual funds are available for virtually every investment strategy (e.g. value, growth), every sector (e.g. it, pharma). So ,even the process of selecting a fund can be tedious.

Types of Mutual Funds:

Mainly there are two types of classification usually done by mutual fund industry i.e. on maturity basis and investment objective basis. Maturity basis classification can be treated as the mother of all fund schemes. On the basis of Maturity period funds classified into three categories:

1.Open-ended Fund :

Open-ended funds do not have any fixed maturity date. An open-ended fund is a fund that is available for subscription and can be redeemed on any working day at any price. It is available for subscription throughout the year and investors can buy and sell units at NAV related prices. The most common type of fund is the open-end fund.

2.Close-ended Fund:

Close-ended funds are open for subscription for a specified period at the time of initial launch. A close-ended fund is a fund that has a defined maturity period as mentioned in the offer document of the scheme.

3.Interval Funds:

Interval funds are the combination of open-ended and close-ended funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals on the prevailing NAV.

On investment objective basis, there are four types of mutual funds. Rest of the schemes are developed of these four categories:

1.Equity fund : invests primarily in stocks

2.Fixed-income fund : invests primarily in bonds

3.Money market fund : invests in money markets and cash equivalents

4.Fund-of-funds : invests in other mutual funds, which usually allows investors to diversify across a variety of mutual fund categories all within one fund.

5.Equity linked Savings Schemes : Equity Linked Savings Schemes or ELSS is a Tax-saving schemes offer tax rebates to investors under Section 80C of the Income Tax Act, 1961. These are growth-oriented schemes and invest primarily in equities.

6.Index Funds : The portfolio of these schemes consist of only those stocks that represent the index and the weightage assigned to each stock is aligned to the stock’s weightage in the index. Returns from these funds are more or less similar to those generated by the Index such as the BSE Sensex or the CNX Nifty.

EXCHANGE TRADED FUND AS INVESTMENT TOOL :

An exchange-traded fund that is based on a basket of securities listed on Exchange. A fund that tracks an index, but can be traded like a stock. ETFs always bundle together the securities that are in an index just like open-ended mutual fund.

Whenever an investor purchases an ETF, he or she is basically investing in the performance of an underlying bundle of securities-  usually those representing a particular index or sector or commodity or bonds.

Advantages of ETFs over mutual funds:      

Trading : ETFs are traded on exchanges so can be sold or purchased at any time. Open-end mutual funds can only be bought or sold once per day at the close of trading.

Capitalgain Tax : Open ended mutual funds must sell shares to finance redemeptions; these funds may trugger capital gains for the remaining shareholders. ETFs are sold to new investors so there is no capital gain trigger.

Cost : ETF shares are bought through stock brokers.This eliminates the cost to the sponsor of marketing the fund to individual small investors and can reduce fees.

Redemption : Unlike mutual funds,ETFs do not have to hold cash or buy and sell securities to pay fund investors when redemption is requested.

Diversification : ETFs may allow you to diversify your portfolio into additional sectors of the market such as commodities.

Disadvantages of ETFs over mutual funds:

Commission : There is a brokerage commission charged when buying and selling ETF shares (unlike a no-load fund).

Managing Fund: There are both actively managed mutual funds and passively managed mutual funds. ETF are passively managed funds.

Redemption: Selling an EFT when you want to or need to may be difficult if the ETF is a thinly traded issue or if the market is experiencing high volatility.

ETFs Vs. Mutual Fund: