An investor of today has a plethora of investment options to consider from such as FDs, stocks, bonds, and of course, mutual funds. Mutual funds have become an incredibly popular investment avenue for a number of compelling reasons. They help an investor explore a wide variety of stocks at reasonable costs.
Factors Affecting Mutual Fund |
Plus, it is extremely convenient to start a mutual fund investment by approaching a fund house, which will update the potential investor with different options available to him and assign a fund manager to overlook and guide him in building a successful investment portfolio.
What are Mutual Funds?
A Mutual fund is a financial instrument formed by collecting a pool of money taken from different investors, which is then invested into securities such as stocks and bonds. An Asset Management Company (AMC) manages the mutual fund with the help of different fund managers who are experts with professional knowledge of how markets function.
Factors Affecting Mutual Fund |
Every investor can have a different investment objective. For example, an investor may be saving money for a short-term goal like marriage or education, while another investor may be saving up for a long-term goal in mind, such as retirement. Fortunately, there are a lot of mutual fund schemes in the market which can be opted for on the basis of an investor’s requirements or investment objectives.
Factors Affecting Mutual Fund |
Some investors will have a limited risk appetite or will be interested in investing only in limited amounts. All the like-minded investors who invest in a particular mutual fund scheme will be allotted units according to their investment amount. The income generated from the investments is divided in proportion to the units held by each individual.
Why Are They a Good Form of Investment?
Diversified Portfolio:
For a layman, mutual fund investments are nothing short of a godsend! It can be tedious for a new investor to sit and research the stocks worth investing in. Thankfully, there are few rules you can refer to before you trade. This is where a diversified portfolio comes in.
Also, if you are looking to invest Rs.1,000 in the stock market, you may end up buying shares of one or two companies. On the other hand, Rs.1000 invested in mutual funds will give you a wider exposure to a basket of different stocks in your portfolio. Even if one or two stocks do not perform, the rest of the stocks in the portfolio compensate for the same, and you are hedged against high risks. Thus, investing in mutual funds ensures that your portfolio is diversified, providing a better cushion against underperforming stocks.
Professional Management:
One of the major upsides of investing in mutual funds is to get connected with professional fund managers who are adept at looking after them. These professionals have the necessary experience and skills to read between the lines and judge which investments will be profitable.
Fund managers conduct a deep fundamental analysis of companies as well as research on the stocks before arriving at the decision of whether to stay invested or exit.
On the other hand, individual investors may end up buying a stock out of greed or may end up selling a stock out of fear. This is called emotional investing, which is devoid of any concrete research. Essentially, mutual funds rely on an unbiased manner of investment guided by professional management and not on ad-hoc decisions.
Flexibility:
Mutual funds offer flexibility to even small investors. You can start an investment with an amount as low as Rs.500 by way of SIPs. Furthermore, there is no lock-in period in mutual fund investments, which means you can exit the investment at any point in time, unlike most other investment options.
This also makes mutual funds the most liquid form of investment. You can get money in your bank account within a period of 3-7 days upon submitting a redemption request with your AMC.
What Should You Be Looking Out for When Investing in a Specific Mutual Fund?
Mutual fund investments are subject to market risks. However, uncertainties related to market volatilities are just one of the factors affecting the performance of mutual funds. Here are some of the other factors that you should look out for, which will affect the performance of a mutual fund:
Cash Flows:
Having adequate cash flows is an important aspect of a well-functioning mutual fund investment. If there is not enough cash circulating in a particular fund, it can be difficult for fund managers to generate enough returns for the investors.
For example, a mutual fund scheme that currently has a combined investment from 100 investors will perform well in comparison with the same scheme having only 70 investors. This means a larger number of investors will obviously mean a larger cash flow, resulting in better overall returns for the investors. If the fund manager faces liquidity issues or does not have enough cash on hand to invest in securities, the performance of the fund will suffer.
Size of the Fund:
The size of the fund must remain optimal. Too little cash flows will affect the performance of the fund, as mentioned above. Whereas, too much or surplus funds invested in one mutual fund scheme may also prove to be detrimental.
Having too much money in a particular scheme may hamper its performance as the fund manager will be facing a hard time managing such a large amount of funds. It is difficult to keep a check on so many investments and that too of such large amounts at one point in time by a single fund manager.
Expense Ratio:
An AMC charges certain expenses and fees from the investor in order to manage the mutual fund investment. All charges, such as administration fees, shareholder fees, distribution fees, and all other fees associated with managing the fund, etc., are included under the expense ratio. Ranging from 0.5% to 3%, the overall returns from the fund get impacted if the expense ratio is too high.
Performance of Securities:
Since mutual fund investments are made in different assets such as stocks and securities, the performance of a mutual fund is directly proportional to its performance. If the underlying asset performs well, the overall fund performs well as well.
Suppose the asset allocation of a mutual fund scheme is 80% equity and 20% debt. The majority of the fund has underlying assets in shares of different companies, and a stock market dip will deeply impact the fund too. Basically, it is important to note that the performance of the fund highly depends upon the asset allocation and the performance of the underlying assets.
Mutual funds are a good investment option provided an investor has done due diligence in selecting the AMC through which investment is made, the skills of the fund manager, and some market knowledge about the latest events that can have a bearing on different sectors or industries.
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