Skip to main content

What is Mutual Fund?


Mutual Fund: It is a pool of different investors money to invest in a investment portfolio and it is managed by professional investment manager. The managers invested the investors fund in a different securities or investment portfolio which helps to maximise the return and minimise the risk after analysing the securities performance in different market conditions. They manage the portfolio or securities on behalf of investors.

The types of funds available in mutual funds are:
Fixed income funds: These funds include debenture, corporate or government bonds which provide regular income to its investors in the form of interest. It is less risky funds and provides low return.
Equity funds: The funds are invested in stocks of a company for longer period. These funds are used when the investor wants to increase his wealth. The stocks are risky in investment but it provides high return.
Balanced Funds: These funds include both fixed income funds like bonds, debenture and equity funds like stocks. If investor wants a regular income and capital appreciation both then balanced funds are used. In which funds are invested in both securities.
Special funds: The funds are invested in special events like program to sustain the environmental resources, program to educate for stop using alcohol, tobacco etc.
Money market funds: These funds include treasury bills, commercial paper etc. The funds invested in these funds by investors who want short term liquidity in its investment instruments. It means the investment instruments have short maturity period.
Index funds: The funds are invested in indexes which are exchange traded funds. There is a low operating cost.  The funds are affected by market situations.
Funds of funds: The funds are invested in funds like asset allocation funds etc.

  Advantages of mutual fund:
  Managed by professionals:
  The funds are managed by professionals who have knowledge of a market and also having an experience of the different funds performance in a different market conditions. The individuals don’t have such knowledge of market.
 Low cost: The cost of managing the funds of an investors is low like if funds are invested in a index funds then when the market goes up and down the prices of stocks moves according to it. There is no much research is conducted.
Tax benefit: Some funds are deductible like interest on debentures, bonds etc.
Transparency: The transactions related to the investment securities are fully transparent. The investors get full information about their investment performance and how the managers used their funds.
Government regulated: It is regulated by Securities Exchange Board of India (SEBI). So, the rights of the investors are fully protected and the chances of fraud is minimises. There are some rules and regulations to meet the grievances of investors if it happens.
Diversification: The funds are invested in different securities to reduce the risk and maximise the return on that investment.
Liquidity: According to the investors objective funds are invested in different securities portfolio. If any investor wants cash immediately he or she can sell the investment securities any time.

Disadvantages of Mutual fund:
Cost: There are some hidden costs which are associated with the fees paid by investors to fund managers who manage their funds.
Fund locked: Not all the funds are available at the time investors want for withdrawal. Some funds are locked for fixed period till that period the investors are not able to with the funds.


Comments

Post a Comment

Popular posts from this blog

How to calculate Cost of Preference Share Capital?

Cost of Preference Share Capital:  An amount paid by company as dividend to preference shareholder is known as Cost of Preference Share Capital. Preference share is a small unit of a company’s capital which bears fixed rate of dividend and holder of it gets dividend when company earn profit. Dividend payable is not a tax deductible amount. So, there is no tax adjustments required for comparing with cost of debt. Formula for Cost of Preference Share: Irredeemable Preference Share Redeemable Preference Share K p  = Dp/NP K p  = D p +((RV-NP)/n )/ (RV+NP)/2 Where, K p  = Cost of Preference Share D p  = Dividend on preference share NP = Net proceeds from issue of preference share (Issue price – Flotation cost) RV = Redemption Value N = Period of preference share Example:  A company issues 20,000 irredeemable preference share at 8% whose face value is Rs.50 each at 4% discount. Find out the Cost of Preference Share Capital.
87 comments
Read more

What is the difference between Cheque book and Pass book?

 Cheque book is issued by bank in customers / account holder request. With the help of this book account holder can withdraw cash from his/her account. Bank does not charge any fee to issued cheque book to its customer. But afterward bank charges some amount for using bank facility like cheque book, Debit card etc.So, Automatic some definite amount deducted from customer bank account. Pass book is  also issued by bank to its customer. It helps to record all the bank related activity according to date that is withdrawal and deposit. It is recorded by bank but the book is kept by customer to know the current balance of  his /her account.  Point of difference Pass book Cheque book What is the meaning of pass book and cheque book? Passbook is a book in which all withdrawal and deposit against customer account is recorded.   Cheque book is a book of cheques which are used to withdrawal the money to bank account.
Post a Comment
Read more

How to calculate interest on Hire Purchase System?

Interest on hire purchase:  Interest is calculated on Cash value of goods not in instalment value which includes cash value of goods and interest amount. It is calculated on yearly, quarterly and yearly basis. Interest is not calculated on down payment which is paid at delivery of goods. Depreciation is also charged on the hire purchase goods at the end of financial year. The method applies for depreciation is based on the contract between the parties.   Example:  Company V purchased a machine of Rs.70, 000 and paid Rs.5, 000 as down payment. The interest charged @6% and 8% depreciation annually. The instalment value for each year is Rs. 10,000. Find out the interest amount for 5 years. Solution: Interest calculated on Rs. Interest Instalment Cash Value 65, 000 65, 000*0.06 = 3, 900 12, 500 8, 600 56, 400 56, 400*0.06 = 3, 384 12, 500 9, 116 47, 284 47, 284*0.06 = 2, 837 12, 500 9, 6
3 comments
Read more