Mutual fund: A buzz word in the small

investor market
By: Sumeet Vaid

Thursday, September 06, 2012

Think of small investments and gold and bank fixed deposits cross your mind in
a jiffy. However, have you ever wondered why average investors are still
restricting their choices to conventional options like gold and Fixed Deposits
when the market is flooded with countless investment opportunities, with
mutual funds being on the top of this segment? The answer to this is lack of
information about how mutual funds work, which makes many investors
hesitant towards mutual fund investments. In fact, many a times, people
investing in mutual funds too are unclear about how they function and how one
can manage them. Listed below are some of the basics of mutual fund that you
should know as an investor.

What describes mutual fund?

When a company collects small investments from multiple investors and uses it
to make varied investments in the market such as bonds, stocks, etc. that
company is known as an asset management company. Every Asset Management
Company floats different mutual funds to suit different types of investors and
seek investments which they in turn invest according to the fund mandate.
Investors by virtue of investing a small portion of the total fund, become
shareholders. They share the profits, losses, dividends etc of the fund
proportional to their share in the total fund.

Who are fund managers?

Fund managers are financial experts, hired by mutual fund companies, who
trade in the market to buy and sell stocks, bonds, with an objective of making
profits. The fund managers have access to wide research on stocks and markets
and also develop a knack to foresee market trends. Investors have to pay an
annual fee in lieu of the service provided by the fund manager.

Types of mutual funds. There are primarily 3-4 types of mutual funds:
Equity funds: This type of fund mainly consists of common shares and stocks
of companies listed in the stock exchanges. They are considered risky but are
likely to give higher profit in the longer term.
Fixed income funds: Also known as low risk funds, these funds mainly invest
in government and corporate enterprise with fixed amount of returns, which are
generally moderate.
Balanced funds: This kind of fund is basically a combination of both bonds and
stocks, which involves moderate to little risk.
Hybrid funds: These are funds that may also include other investment classes
in their portfolio like gold apart from equity and debt.

Mutual fund purchase price

Investors have to pay a fee called expense ratio that includes the management
fee, distribution fee and the administrative cost of the fund. There is no choice
on this, as these expenses are deducted from the asset value. Apart from this fee,
there is something called sales charge, which is payable either at the time of
entering the fund or exiting the fund or both. These charges have come down
significantly in the last few years. There are many funds which can be bought
without paying sales charge. Most of these funds will have to be bought directly
from the asset management company without having an agent to explain the risk,
return or do the paperwork for you.