Mutual Fund: everything about the investment vehicle: [Essay Example], 1786 words (2022)

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Liquidity Costs Patience FAQs Videos

This essay has been submitted by a student. This is not an example of the work written by professional essay writers.

What are mutual funds: A mutual fund is an investment vehicle, which pools money from investors with common investment objectives. It then invests their money in multiple assets, in accordance with the stated objective of the scheme. The investments are made by an “asset management company” or AMC. For example, an equity fund would invest in stocks and equity-related instruments, while a debt fund would invest in bonds, debentures, etc.

(Video) What is a Mutual Fund and How Does It Work? How to find Best Mutual Funds to Invest in 2019

As an investor, you put your money in financial assets like stocks and bonds. You can do so by either buying them directly or using investment vehicles like mutual funds. In this segment, we will understand mutual funds and how to trade in them. History of mutual funds in India Mutual funds in India have come a long way since 1964 when the Unit Trust of India was the only player. By the end of 1988, UTI had total assets worth Rs 6,700 crore. Soon after, eight funds were established by banks, LIC and GIC between 1987 and 1993. The total number of schemes went up to 167 and total money invested – measured by Assets under Management (AUM) – shot up to over Rs 61,000 crore. In 1993, private and foreign players entered the industry, marking the third phase. The first entrant was Kothari Pioneer Mutual fund, which launched in association with a foreign fund.

The Securities and Exchange Board of India (SEBI) formulated the Mutual Fund Regulation in 1996, which, for the first time, established a comprehensive regulatory framework for the mutual fund industry. Since then, several mutual funds have been set up by the private and joint sectors. Currently there are around 45 mutual fund organizations in India together handling assets worth nearly Rs 10 lakh crore. Today, the Indian mutual fund industry has opened up many exciting investment opportunities for investors. As a result, we have started witnessing the phenomenon of savings now being entrusted to the funds rather than in banks alone. Mutual Funds are now perhaps one of the most sought-after investment options for most investors. As financial markets become more sophisticated and complex, investors need a financial intermediary who can provide the required knowledge and professional expertise on taking informed decisions. Mutual funds act as this intermediary.

Why invest in mutual funds Investing in mutual funds offers a multitude of benefits. Let’s have a look: Professional Investment Management: When you invest in a mutual fund, your money is managed by professional experts. This is one of the primary benefits of investing in mutual funds. Being full-time, high-level investment professionals, a good investment manager is more resourceful and capable of monitoring the companies the mutual fund has invested in, rather than individual investors. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. Simply put, they have the know-how to trade in the markets that retail investors may not possess. Low investment threshold mutual fund enables you to participate in a diversified portfolio for as little as Rs 5000, and sometimes even lesser. And with a no-load fund, you pay little or no sales charges to own them.

For example, some bonds and fixed deposits have a minimum investment amount of Rs 25,000. Instead, you can give your money to a mutual fund, which will in turn invest in the bonds and fixed deposits. This could be done for as little as Rs 1000.Professional Investment Management: When you invest in a mutual fund, your money is managed by professional experts. This is one of the primary benefits of investing in mutual funds. Being full-time, high-level investment professionals, a good investment manager is more resourceful and capable of monitoring the companies the mutual fund has invested in, rather than individual investors.

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The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale. Simply put, they have the know-how to trade in the markets that retail investors may not possess. Convenience Investing in mutual funds has its own convenience. You save up on additional paper-work that comes with every transaction, the amount of energy you invest in researching for the stocks, as well as actual market-monitoring and conduction of transactions. With a mutual fund, you don’t have to do any of that. Simply go online or place an order with your broker to buy a mutual fund. Another big advantage is that you can move your funds easily from one fund to another, within a mutual fund family. This allows you to easily rebalance your portfolio to respond to significant fund management or economic changes.

Liquidity

In open-ended schemes, you can get your money back at any point in time at the prevailing NAV (Net Asset Value) from the Mutual Fund itself. This makes mutual fund investments highly liquid. Compare that with a fixed deposit or a bond which may have a fixed investment duration. Variety While investing in mutual funds, you are spoilt for choice. You have a number of mutual fund schemes to choose from, which may invest in a whole range of industries and sectors, different kinds of assets, and so on. You can find a mutual fund that matches just about any investment strategy you select.

There are funds that focus on blue-chip stocks, technology stocks, bonds, or a mix of stocks and bonds. In fact, the greatest challenge can be sorting through the variety and picking the best for you. Transparencies regulations for mutual funds have made the industry very transparent. You can track the investments that have been made on your behalf to know the sectors and stocks being invested in.

In addition to this, you get regular information on the value of your investment. Mutual funds are mandated to publish the details of their portfolio regularly. How to choose a fund Money is precious. It is hard-earned. You can’t just put your money in an investment vehicle or mutual fund without some research.

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Here are some things to keep in mind while choosing a fund: Past performance: History is important. Before investing, check the historic performance of the mutual fund scheme, the asset manager’s investment decisions, fund returns and so on. While the past performance is not an indicator of the future, it could help you figure out what to expect in the future. You can understand the investment philosophies of the fund and the kind of returns it is offering to investors over a period of time. It would also make sense to check out the two-year and one-year returns for consistency.

Statistics such as how the fund had performed in the bull and bear markets of the immediate past would help you understand the strength of a fund. Tracking the fund’s performance in the bear market is particularly important because the true test of a portfolio is often revealed in how little it falls during a bearish phase. Match the scheme’s risk with your profile: Even though a mutual fund diversifies its portfolio to reduce risk, they may eventually invest in a single type of asset. The risk of the fund varies with the kind of assets it is invested in. For this reason, check if the mutual fund fits your risk profile and investment horizon. For example, certain sector-specific schemes come with a high-risk, high-return tag. Such plans are suspect to crashes in case the industry or sector loses the market’s fancy. If the investor is risk-averse, he could instead opt for a debt scheme with little risk.

However, if you are a long-term investor, who doesn’t mind risk, you could go ahead with the sector-specific mutual fund scheme. For this reason, most investors prefer balanced schemes, which invest in a combination of equities and debts. They are less risky that pure equity or growth funds, which are likely to give greater returns, but more risky than pure debt plans. Diversification While choosing a mutual fund, one should always consider factors like the extent of diversification that a mutual fund offers to your portfolio. A mutual fund can offer diversification either by investing in multiple assets, or by balancing your overall portfolio.

For example, suppose your portfolio contains 70% exposure to stocks from different industries, then it makes sense to invest the 30% in a debt fund to balance the portfolio. Similarly, if your portfolio has a lot of exposure to a particular sector like IT, then avoid investing in a mutual fund that also invests in IT. This way, you can balance your exposure to a similar kind of risk. Know your fund manager: The success of a fund, to a great extent, depends on the fund manager. Some of the most successful funds are run by the same managers. It would be sensible to always ask about the fund manager before investing as well as knowing about changes in the fund manager’s strategy or any other significant developments that an AMC may have undergone.

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For instance, if the portfolio manager, who generated the fund’s successful performance, is no longer managing that particular fund, you may do well to wait and analyze the pros and cons of investing in that fund. Read the fine print: The prospectus says a lot about the fund. Reading the fund’s prospectus is a must to learn about its investment strategy and the risk that it is prone to. Funds with higher rates of return may carry a higher element of risk. Hence, it is of utmost importance that an investor always chooses a particular scheme after considering his financial goals and weighs them against the mutual fund’s risk. That said, remember that all funds carry some level of risk. Just because a fund invests in government or corporate bonds does not mean that it does not have any risk.

Costs

A fund with high costs must perform better than a low-cost fund to generate returns for you. Even small differences in fees can translate into large differences in returns over a period of time.

So, ensure the costs and returns tally. There is no point in spending extra if it is delivering the same kind of returns like a low-cost fund.

Patience

Finally, an investor must not enter and exit mutual funds as and when the market turns. Market cycles are natural. Be patient. Like stocks, mutual funds too pay off only if you have the patience to wait. This applies for both buying and selling. Don’t pick a fund simply because it has shown a spurt in value in the current rally. Ensure its returns are consistent. Similarly, don’t sell off a mutual fund just because it is not performing well due to poor market conditions. However, it makes little sense to hold on to a fund that lags behind the market year after year.

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FAQs

What are the vehicles of investment short answer? ›

Investment vehicles can be low risk, such as certificates of deposit (CDs) or bonds, or they can carry a greater degree of risk, such as stocks, options, and futures. Other types of investment vehicles include annuities; collectibles, such as art or coins; mutual funds; and exchange-traded funds (ETFs).

What is mutual fund in simple words with example? ›

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.

What is an investment vehicle offered by mutual funds? ›

A Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds to investors, allowing them to invest small amounts periodically.

What is mutual fund in short answer? ›

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds.

What are the 4 types of investment vehicles? ›

The most common types of collective investment vehicles are mutual funds, exchange traded funds, collective investment schemes and venture capital funds.

What are the three objectives in the selection of investment vehicles? ›

Safety, income, and capital gains are the big three objectives of investing. But there are others that should be kept in mind when they choose investments. Tax Minimization: Some investors pursue tax minimization as a factor in their choices.

What is the importance of mutual funds? ›

Mutual funds are created as baskets of investments, which invest in financial instruments like stocks and bonds according to their defined investment objectives. Investing in them allows an investor to gain access to asset classes like equities, bonds or fixed income securities, commodities, and even bullion.

What are the benefits of mutual funds? ›

Low Costs: Mutual funds are one of the best investment options considering the costs involved. They are a relatively less expensive if compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.

What is types of mutual fund? ›

Different Types of Mutual Funds
  • Equity or growth schemes. These are one of the most popular mutual fund schemes. ...
  • Money market funds or liquid funds: ...
  • Fixed income or debt mutual funds: ...
  • Balanced funds: ...
  • Hybrid / Monthly Income Plans (MIP): ...
  • Gilt funds:

Is a mutual fund an investment vehicle? ›

A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities. Mutual funds give small or individual investors access to diversified, professionally managed portfolios.

Is a fund an investment vehicle? ›

A fund of funds is a type of pooled investment vehicle that primarily invests in other funds, instead of directly investing in debt or equity securities of operating companies, often with the goal of achieving improved asset allocation, diversification, or other investment objectives.

Is mutual funds a good investment? ›

Are Mutual Funds a Good Investment? Mutual funds are a good investment for investors looking to diversify their portfolios. Instead of going all-in on one company or industry, a mutual fund invests in different securities to try and minimize your portfolio's risk.

What is mutual fund investment and how it works? ›

How mutual funds work. Mutual funds work by pooling money together from many investors. That money then gets used to purchase stocks, bonds and other securities. Because mutual funds invest in a collection of companies, they offer instant diversification (thus lower risk) to investors.

What was the first mutual fund? ›

The modern mutual fund that we know today first appeared in Boston in 1924 with the introduction of the Massachusetts Investors' Trust, which was the first mutual fund with an open-end capitalization, allowing the fund to continuously issue and redeem its shares.

Are vehicles a good investment? ›

Your car may be considered an asset because you can sell it for a large amount of money. This can help in emergency situations and may help you to get out from underneath the loan. But your car is not an investment. It depreciates over time.

What are the most common investment vehicles? ›

The most common investment vehicles are exchange-traded funds, mutual funds, bonds, stocks, certificates of deposit, and annuities.

Which of the following investment vehicles has the highest risk? ›

Correct answer: Option E) Stocks. Explanation: Investment in stocks is riskier compared to investment in other forms like government bonds, which are usually risk-free securities, certificates of deposit, cash, and equivalents.

What is the purpose of investment? ›

Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.

What is the important of investment? ›

Investing helps you grow your money which can then be used to meet your future financial goals. When you invest your money, it is likely to provide you with returns. These returns can either be guaranteed`` or market-linked depending on where you invest your money.

How mutual funds affect the economy? ›

Development of financial sector enhances the four pillars of the Financial System: Efficiency, stability, transparency, and inclusion. Mutual fund investing plays an important role in this development. They pool the resources from the small investors together, thus increasing participation in the financial markets.

How do mutual funds make money? ›

Mutual funds make money by charging investors a percentage of assets under management and may also charge a sales commission (load) upon fund purchase or redemption. Fund fees, called the expense ratio, can range from close to 0% to more than 2% depending on the fund's operating costs and investment style.

Are mutual funds safe? ›

Mutual funds are a safe investment if you understand them. Investors should not be worried about the short-term fluctuation in returns while investing in equity funds. You should choose the right mutual fund, which is in sync with your investment goals and invest with a long-term horizon.

How do you manage mutual funds? ›

How to Manage Your Mutual Funds Smartly/Wisely
  1. Start out right with portfolio diversification. ...
  2. If on the SIP route, top it up during market corrections. ...
  3. Avoid stagnancy by rebalancing your portfolio periodically. ...
  4. Adopt a passive investment strategy with index funds.
1 Oct 2021

What are the features of mutual funds? ›

Features of Mutual Funds
  • Managed by a qualified expert. ...
  • Open-ended and close-ended funds. ...
  • Lump Sum and SIP Investment. ...
  • No fixed returns. ...
  • Equities can make losses. ...
  • Debt funds are relatively safer. ...
  • Different ways of investing. ...
  • Charges of mutual funds.
12 Apr 2019

What are the characteristics of mutual funds? ›

  • Low Fees or Expenses. Mutual funds with relatively low expense ratios are generally always desirable, and low expenses do not mean low performance. ...
  • Consistently Good Performance. ...
  • Sticking to a Solid Strategy. ...
  • Trustworthy, With Solid Reputations. ...
  • Plenty of Assets, but Not Too Much Money.

Which is best mutual fund? ›

Best Performing Equity Mutual Funds
Fund Name3-year Return (%)*5-year Return (%)*
ICICI Prudential Technology Direct Plan-Growth29.85%26.53%
Aditya Birla Sun Life Digital India Fund Direct-Growth27.66%25.63%
SBI Technology Opportunities Fund Direct-Growth25.80%24.65%
Quant Tax Plan Direct-Growth40.39%23.44%
6 more rows

What is mutual fund advantages and disadvantages? ›

Mutual Funds: An Overview

Some of the advantages of this kind of investment include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

Which type of mutual fund is best? ›

Capital Protection Funds are the best bet for individuals who want to ensure protection of their principal invested amount. Under such schemes, the funds are split between investment in equity markets and fixed income instruments.

How many investment vehicles are there? ›

Broadly speaking, investors can access four types of investment vehicles. These include separately managed accounts (SMAs), commingled funds, mutual funds, and exchange-traded funds (ETFs).

How much is mutual funds? ›

Mutual fund fees are expressed as a percentage, or expense ratio, of your overall investment. They typically range from . 5% to 1.5% for actively managed funds, and . 2% for passively managed funds.

How do mutual funds trade? ›

When you buy or redeem a mutual fund, you are transacting directly with the fund, whereas with ETFs and stocks, you are trading on the secondary market. Unlike stocks and ETFs, mutual funds trade only once per day, after the markets close at 4 p.m. ET.

Which investment vehicle represents an ownership interest in a company? ›

Equities represent an ownership interest in a publicly traded corporation or pooled investment vehicle and may offer growth potential that can help you meet longer-term goals. Includes common stock, exchange traded funds, closed-end funds, certain listed preferred stocks and American Depositary Receipts.

What is a funding vehicle? ›

Funding Vehicle means the financial instrument(s), including Annuity Contracts and Custodial Accounts, issued for the purposes of funding accrued benefits under this Plan and specifically approved by the Employer for use under this Plan.

What is a property investment vehicle? ›

If you buy through a property investment company, you own the property investment company. The company then buys the properties, the mortgages are in the company's name, and the company pays corporation tax on any profit from the buy-to-let properties.

Who sells the fund as an investment opportunity? ›

One class may be sold through a stockbroker or financial adviser with an initial commission (front-end load); such a class might be called retail shares. Another class may be sold with no commission (load) direct to the public; such a class is called direct shares.

What is a special purpose vehicle? ›

A special purpose vehicle (SPV) is a subsidiary company that is formed to undertake a specific business purpose or activity. SPVs are commonly utilized in certain structured finance applications, such as asset securitization, joint ventures, property deals, or to isolate parent company assets, operations, or risks.

How do I start an investment fund? ›

How to legally start a hedge fund
  1. Define your strategy. The first thing you need to do is define your investment strategy as clearly as possible. ...
  2. Incorporate. ...
  3. Complete the proper registrations. ...
  4. Write your investment agreement. ...
  5. Get your team together. ...
  6. Market yourself. ...
  7. Launch.

What are the 4 types of mutual funds? ›

There are four broad types of mutual funds: Equity (stocks), fixed-income (bonds), money market funds (short-term debt), or both stocks and bonds (balanced or hybrid funds).

Are mutual funds risk free? ›

Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict what will happen in the future or whether a given asset will increase or decrease in value. Because the market cannot be accurately predicted or completely controlled, no investment is risk-free.

How many mutual funds are there? ›

In 2021, there were 7,481 mutual funds in the United States. This is a reasonable decline from the previous year, and reverses the upward trend of the preceding decade, most likely due to the economic effects of the global coronavirus (COVID-19) pandemic.

How does mutual fund growth plan work? ›

In a growth plan, the fund does not payout anything to the investors by way of regular payouts or dividends. All the profits of the fund are reinvested in the fund and so your wealth compounds automatically. When it comes to long term wealth creation, the growth plan is o auto mode.

Can you invest in mutual funds on your own? ›

If you don't have access to an employer-sponsored retirement account or are investing for a goal outside of retirement, you can invest in mutual funds by opening a brokerage account on your own and investing in the following plans: Individual retirement accounts (IRAs).

What is the origin of mutual fund? ›

The Mutual Fund industry in India started in 1963 with formation of UTI in 1963 by an Act of Parliament and functioned under the Regulatory and administrative control of the Reserve Bank of India (RBI).

What are the most common investment vehicles? ›

The most common investment vehicles are exchange-traded funds, mutual funds, bonds, stocks, certificates of deposit, and annuities.

What is a property investment vehicle? ›

If you buy through a property investment company, you own the property investment company. The company then buys the properties, the mortgages are in the company's name, and the company pays corporation tax on any profit from the buy-to-let properties.

What are 3 types of savings vehicles? ›

Three major examples of savings vehicles are savings accounts, money market accounts (MMAs) and certificates of deposit (CDs).

Are vehicles a good investment? ›

Your car may be considered an asset because you can sell it for a large amount of money. This can help in emergency situations and may help you to get out from underneath the loan. But your car is not an investment. It depreciates over time.

How many types of investment vehicles are there? ›

4 Types of Investment Vehicles As we've illustrated, there are many options when it comes to investment vehicles, but they're typically broken down into four main types.

How many investment vehicles are there? ›

Broadly speaking, investors can access four types of investment vehicles. These include separately managed accounts (SMAs), commingled funds, mutual funds, and exchange-traded funds (ETFs).

What is the best way to invest money to make money? ›

  1. High-yield savings accounts. Online savings accounts and cash management accounts provide higher rates of return than you'll get in a traditional bank savings or checking account. ...
  2. Certificates of deposit. ...
  3. Money market funds. ...
  4. Government bonds. ...
  5. Corporate bonds. ...
  6. Mutual funds. ...
  7. Index funds. ...
  8. Exchange-traded funds.
3 days ago

What is the best way to invest money? ›

Overview: Best investments in 2022
  1. High-yield savings accounts. ...
  2. Short-term certificates of deposit. ...
  3. Short-term government bond funds. ...
  4. Series I bonds. ...
  5. Short-term corporate bond funds. ...
  6. S&P 500 index funds. ...
  7. Dividend stock funds. ...
  8. Value stock funds.

What are the 3 types of mutual funds? ›

Mutual funds offer one of the most comprehensive, easy and flexible ways to create a diversified portfolio of investments.
...
Different Types of Mutual Funds
  • Equity or growth schemes. ...
  • Money market funds or liquid funds: ...
  • Fixed income or debt mutual funds: ...
  • Balanced funds:

Which of the following investment vehicles has the highest risk? ›

Correct answer: Option E) Stocks. Explanation: Investment in stocks is riskier compared to investment in other forms like government bonds, which are usually risk-free securities, certificates of deposit, cash, and equivalents.

What is a funding vehicle? ›

Funding Vehicle means the financial instrument(s), including Annuity Contracts and Custodial Accounts, issued for the purposes of funding accrued benefits under this Plan and specifically approved by the Employer for use under this Plan.

What is an investment vehicle offered by mutual funds to investors Mcq? ›

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Mutual funds are regulated investment products offered to the public and available for daily trading.

What is the best way to save money and earn interest? ›

Low Risk, Stable Returns: 6 Best Ways to Earn Interest in 2022
  1. High Yield Savings Accounts. ...
  2. High-Yield Checking Accounts. ...
  3. CDs and CD Ladders. ...
  4. Money Market Accounts (MMAs) ...
  5. Government-Backed Bonds. ...
  6. Treasury Bills. ...
  7. Bottom Line.
16 Jun 2022

What is saving vehicle? ›

A savings vehicle is just a way to hold your savings. A savings vehicle can be as simple as a savings account at your financial institution. It can be a term deposit or a bond, or it can be a sophisticated investment.

Which account is best for saving? ›

With that in mind, here are some options to consider.
  1. High-yield savings account. ...
  2. Certificate of deposit (CD) ...
  3. Money market account. ...
  4. Checking account. ...
  5. Treasury bills. ...
  6. Short-term bonds. ...
  7. Riskier options: Stocks, real estate and gold. ...
  8. 8 best short-term investments in September 2022.
27 Jun 2022

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