Mutual funds are a collective funding for investment in various shares , stocks or bonds. This is a way of indirectly purchasing shares or stocks from the market.The company offering the mutual fund invests on behalf of the investors. The value of mutual funds are determined at the end of the day and second to second price fluctuation does not apply here.The price of each share is determined by dividing the market value by the number of shares outstanding.However high hoisted a company is , the value of its shares is never guaranteed. It could fall apart in a matter of seconds. The whole idea of a mutual fund is to invest in shares of many companies that may have positive returns , so that even if they fall down , the difference is made up for.
Why SHOULD one invest in a mutual fund
1. Comparatively lower risk
The risks one faces in a mutual fund is comparatively lower than the risk one faces when you directly invest in the market. The company tends to absorb most of the risks leaving you with a smaller effect in case of situations like when the market value goes down .The company is able to do this by diversification and avoiding the act of putting all your eggs in ONE basket.
2. Expertise and professionalism
The mutual fund company has better knowledge of how to deal with your investment in share, stocks, bonds etc. Being their job , they have the required skill and experience to analyze/ understand the market and accordingly sell or maintain the securities
You can start off with buying shares of smaller value. There is no compulsion to block a huge amount of money in these investments if you’re unwilling
As compared to directly investing in securities , it is relatively easier to get in our out of the mutual fund.
5. No requirement for diverse portfolio
Not every one of us can afford to create a diverse portfolio on our own and a mutual fund eliminates our need to do so with stock by stock investment
Why SHOULDN’T one invest in a mutual fund
1. No second-by second notification
Because the securities are estimated at the end of the day , the investor is put in the dark about how his investment is doing at any other time.
2. No guarantee of return of principal.
At any point of time , a 100% return of your initial principal amount is not guaranteed
Various intermediary fees like management costs , admin costs etc can reduce the profits you’re earning on your securities.
4. Dependence on the company
When you invest in a mutual fund , the way your investments bloom or falls depends on how it’s being handled by the company. Thus expertise and experience are determinants for your investments outcome and you have no control.
Although it has its pros and cons , I think investing in a mutual fund is playing safe.Direct or indirect investment , it is always best to do your homework . This could make a lot of difference in your returns.