Mutual Funds: What They Are And What To Watch Out For?
Investment in mutual funds is therefore carried out by purchasing a certain quantity of units, the value of which varies according to the performance of the investments in which the fund’s assets are used.
Mutual funds can be categorized according to the instruments they invest in. Depending on the area of intervention, therefore, they can be:
- Equity funds, which invest primarily in equity securities
- Bond funds, if they focus mainly on bonds
- Balanced funds, which have as their object both shares and bonds in varying percentages towards one or the other category
- Money market funds, focused on the money market
One of the most common distinctions between the funds that it is usual to make is that concerning the form, which can be open or closed. It is said that a mutual fund is of the open type when the participants have the right to request, at any time, the redemption of the units according to the methods provided for by the fund’s operating rules (i.e. they can freely buy or sell fund units).
While it is said that the fund is closed-end when the right to redeem the units is recognized to participants only at predetermined deadlines.
The advantages of investment in mutual funds India depend mainly on the fact that the company that manages it invests all the capital raised among savers in the various financial instruments, defined by the asset allocation (i.e. the allocation of the total assets between the various instruments) established from time to time.
First of all, there is therefore a diversification advantage, which otherwise would not be achieved by a single saver (especially for those who do not have high availability).
Another benefit that a mutual fund investor might enjoy is that of the mandate he gives the fund manager to administer his money.
However, there are also some characteristics of mutual funds that need to be carefully evaluated. First of all, it must be understood whether the fund’s category and area are compatible with our investment needs and our risk aversion/propensity profile.
A professional, in fact, has the skills, training and experience to make more advantageous decisions and should therefore be able to beat the market (i.e. record greater rises of the benchmark in times of bullish market, suffer minor losses in phases of bearish market or/and still maintain more performances in phases of very accentuated volatility are constant).
It is also important to have full knowledge of the costs, which can be of various kinds. In fact, there may be:
- Entry fees, at the time of purchase of the share;
- Management fees, i.e. Recurring costs (typically annual) related to the administration of the fund;
- Performance fees, proportional to some results achieved by the instrument;
- Exit commissions, upon the sale of the share;
- Other costs.
However, each cost is clearly stated in the prospectuses. On the other hand, analyzing the track record, i.e. past returns, of the fund (compared to the reference benchmark) is a double-edged sword: the fact of having previously achieved certain results does not guarantee that this trend will be maintained in the future as well.
These were some of the things that should be kept in mind while thinking of investing in mutual funds, to know the best way to invest in mutual funds online India, we suggest you to turn to the experts of RKFS.