Basically, households have three choices with regard to savings options:
Hold the liabilities of traditional intermediaries, such as banks, thrifts, and insurance companies. This means holding savings accounts, money market deposit accounts (MMDAs), and so forth.
Hold securities directly, such as stocks and bonds purchased directly through brokers and other intermediaries.
Hold securities indirectly, through mutual funds and pension funds.
Investors always have direct investing as an option, making their own buy and sell decisions, typically through a brokerage account.If an investor has the time and ability, he/she can make the decisions in terms of managing the portfolio. With direct investing, individual makes the decisions about his/her own investment.
Most of the many investor don't have enough funds to invest, don't have enough time and expertise to make ongoing changes in the portfolio, making the necessary selling and buying decision based on current market information. Pension funds and mutual funds are the type of indirect type of investment options for people who lack in funds, time and expertise.
What is Mutual fund ?
A mutual fund is an investment company that pools the money of various investors and buys and manages a diversified portfolio of securities. The investors, or shareholders, buy shares of he mutual fund, representing ownership in all of the fund's securities. Investors share in the success, or lack of success, of the mutual fund they buy in direct proportion to the amount of the mutual fund shares they own.
Mutual funds can be classified into four groups:
Equity funds (hold stocks of various corporations)
Bond funds (hold debt securities of various issuers, such as governments and corporations)
Hybrid funds (hold a combination of stocks and bonds and sometimes other securities)
Money Market Funds (hold short-term, very safe assets such as Treasury bills and bank certificates of deposit)
ADVANTAGES OF MUTUAL FUNDS:
- Professional Management: The basic advantage of mutual funds is that they are professionally managed by well qualified professional. Investor does not have time or the expertise to manage their portfolio. So mutual funds are less expensive to make and monitor their investments.
- Diversification: Mutual funds invest in a number of companies across a broad cross-section of industries and sectors. So by purchasing mutual funds, risk is spread out and minimized to certain extent as the loss in any particular investment is minimized by gains in others.
- Convenient Administration: Investing in a mutual fund reduces paper work and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.
- Return Potential: Over a medium to long term, mutual funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.
- Low costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investor.
- Liquidity: In open ended scheme, you can get your money back promptly at net asset value related prices from the Mutual fund itself. With closed- ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.
- Transparency: 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 managers investment strategy and outlook.
- Flexibility: You can systematically invest or withdraw funds according to your needs and convenience.
- Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
- Well Regulated: All mutual funds are registered with SEBI and they function with the provision of strict regulations designed to protect the interest of investors. The operations of mutual Funds are regularly monitored by SEBI.
- Tax Benefits: There is a 100% Income Tax exemption on all mutual fund dividends.
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