MUTUAL FUNDS

INTRODUCTION

According to Investment Company Act of 1940, mutual funds are investments done by many investors who want to invest money in many business sectors indirectly. Mutual funds are always dwelt by third parties. Mutual fund is just like the connecting bridge or a financial intermediary that helps investors to pool their money together with a well defined investment objective goal. Mutual funds are assumed to be one of the best available investments when compared to others as they are cost efficient and also easy to invest in and helps investors to purchase stocks or bonds with much lower prices.


Description
In mutual fund they will have a fund manager who will be held responsible for investing the gathered money into specific securities like (stocks or bonds). When we want to invest in a mutual fund, we will be buying units or portions of that mutual fund and thus investor becomes a shareholder that fund. There are three different kinds of mutual funds which will help the investor to improve their shares accordingly. They are
1. Open-ended funds: This means having the facility to withdraw the investments made by the investors at any point of time.
2. Closed ended funds: This means the investors keep their investments in that particular fund for a certain period of time.
3. No load fund
An investor who wants to invest in mutual funds will have has many questions left unanswered before him. Starting with the basic one like the difference between mutual fund and stock, risk factors, time of redemption and many more.
Here's an overview answer to these questions.
Firstly Difference between stocks and mutual funds: when we invest in stocks it means we are purchasing the shares offered in a prospective company. We get more profits if the company success rate is high but if it fails the the investor might incur losses. But In the case of a mutual fund investor’s money is invested in a group of stocks, bonds, and securities. This is known as fund portfolio. Here if one stock fails to perform well, then the other well performing stocks will compensate for the losses and also get the investors a good profit.
Secondly when to redeem mutual fund? Generally, most of the mutual fund shares are 'redeemable', which means that an investor can sell his shares back to the fund. In the fund prospectus which will be provided at the time of buying will have the details about redemption of fund shares which includes the exit load or redemption charges that the investor will pay for exiting the fund.



Thirdly about Tax consequences: Usually, the investors are supposed to pay income tax to the government each year on the dividends or interest which they receive on their mutual funds. However, the investors will not pay any capital gains tax until they actually sell and make a profit. Sometimes they may be exempted from paying tax for some bond funds. The investor will have to pay the capital gains tax when he sells the funds which he owns and make a profit.
Some drawbacks of mutual funds Like any other investment mutual funds has its own share of risks. It is always better to invest in a mutual fund which will serve specific investment purpose like meeting the expenses for the child's education, or saving for retirement etc.