Hi Everyone! Today we shall discuss what mututal funds are, what are the risks involved in mutual funds, what are the pros and cons of investing in mutual funds. Sit back, and read the full article till the end and feel free to drop the comments in case of any doubts.
What are mutual funds?
Mutual funds are professionally managed funds where in the pooled money from several thousand investors are used to purchase stocks and securities for the returns in future. An individual investing in the mutual funds need not know about each and every stocks that the fund house is planning to invest in. Knowing the sector of investment would suffice, this brings down the complexity for an investor.
Risks involved in mutual funds:
1. Market risk: Mutual funds investing in stocks are directly linked with the movement in the market. If the market is bullish, then the returns on the mutual funds are high, if the market is bearish, then there will be negativity in the invested amount. Anything that would directly affect market would affect funds houses investment as they are investing the stocks as well. For eg: Corona virus impacted most of the mutual funds during the period, and has been recovered now.
Some news of war between Russia and Ukraine, and there are several other factors that affect the MFs.
2. Inflation: Inflation is defined as the general increase in the price of goods and commodities. When inflation occurs, the prices of the products increase there by affecting the stock market as the Purchasing power parity of the currency decreases.
3. Interest rate risk: Interest rates in a market reflect the availability of credit, and the economic state of the country influences it. This usually affects the fixed-income mutual funds and investments such as debt funds. As interest rates go up, investment in bonds seems less profitable than other investment options, and their prices go down. The reverse is also true.
4. Credit risk: Credit Risk is the risk associated with a bond defaulting on the grounds of non-payment by the lender. Thus, this impacts all mutual funds that may have exposure to bonds. Credible agencies give ratings to bonds based on the risk associated with a bond. Generally, the PSU bonds or AAA bonds are the safest and possess the least credit risk.
Advantages:
1. Professional Management: The mutual funds are managed by fund house experts who have in depth knowledge about the sector, and the market. The team of experts manage these pooled money by investing in the stocks only after detailed analysis of balance sheet, profit – loss statement of these companies. This helps a normal person to cut his time in studying, analysing and researching which is almost next to impossible in the daily life.
2. Diversification: Asset diversification is one of the prime advantage of investing in the mutual funds. It allows you to diversify the investment, thereby cutting off the risk involved in a single type of investment. For eg: Investing in healthcare, gold debt MFs, IT funds would be really a nice combo of diversification. If one of these sectors take a hit in one of the quarters, then it doesn’t affect all your fund amount.
3. Transparency: The common perception is that mutual funds are less secure than bank products. This is a myth as statutory government organizations like SEBI and AMFI have complete authority over fund houses. Account statements provide you with regular updates on the value of your investment, and portfolio disclosures, which show the percentage invested in each asset class provide disclosures on the investments made by your plan. The documents relating to the schemes detail each scheme’s asset allocation and investment plan. Furthermore, the credentials of the fund company and the asset manager can be easily verified by SEBI. They also have a platform for unbiased dispute resolution that serves investors’ interests
In the next article, i will explain about the different types of mutual funds, and the sectors of mutual funds, and the history of ROI (Return of investment) in each of the mutual funds. Feel free to comment in case of any doubts.
Together!!
Good one, thanks.