Mutual Funds |
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By: Ankit Agarwal Posted: 2008-11-04 06:13:02 |
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A mutual fund is a company that pools investors' money to make multiple types of investments, known as the portfolio. Stocks, bonds, and money market funds are all examples of the types of investments that may make up a mutual fund. The mutual fund is managed by a professional investment manager who buys and sells securities for the most effective growth of the fund. As a mutual fund investor, you become a "shareholder" of the mutual fund company. When there are profits you will earn dividends. When there are losses, your shares will decrease in value. Mutual funds are, by definition, diversified, meaning they are made up a lot of different investments. That tends to lower your risk (avoiding the old "all of your eggs in one basket" problem). Because someone else manages them, you don't have to worry about diversifying individual investments yourself or doing your own record keeping. That makes it easier to just buy them and forget about them. That's not always the best strategy, however since your money is in someone else hands, after all.So,a little bit of research always comes in handy. Since the fund manager compensation is based on how well the fund performs, you can be assured they will work diligently to make sure the fund performs well. Managing their fund is their full-time job!Mutual funds are classified on the basis of their underlying investments such as debt, equity or balanced funds. There are two broad categories:1) Close-ended fund (CEF) Under a CEF, investors have to lock their investment for the period specified in the offer document issued at the time of the launch of the fund. The investors can buy units directly from the fund only during the 'new fund offer' (NFO) period. Thereafter, any transaction relating to buying or selling of units has to be done through the stock market, like any other scrip listed at the stock exchanges.While an investor has to compromise on liquidity, a fund manager of a CEF can provide better returns than OEF as he is not subjected to the pressure of redemption's on an ongoing basis.Bottom Line:Aimed at Capital Appreciation over a larger period of time.For the investor who doesn't want to monitor his/her investments on a regular basis2) Open-ended fund (OEF) An open-ended fund is one which is always open to accept money from investors and to return the money back to investors. An open-ended fund indicates that the AMC is always ready to accept money from investors and always willing to return the amount whenever investors demand it.Bottom Line:Aimed at profit realization along with Capital Appreciation over a larger period of time.For the investor who doesn't want to lock his/her money for a long duration and has a better risk profile(appetite to take risks).Obviously,more profitableA step-by-step journey to Opulence!
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