Why Mutual Funds?

Mutual Funds are becoming a very popular form of investment characterized by many
advantages that they share with other forms of investments and what they share with
other forms of investments and what they possess uniquely themselves. The primary
objectives of an investment proposal would fit into one or combination of the two broad
categories i.e. Income and Capital gains. How mutual fund is expected to be over and
above an individual in achieving the two said objectives, is what attracts investors to opt
for Mutual Funds. Mutual Funds route offer several important advantages.
1) Diversification
A proven principle of sound investment is that of diversification
which is the idea of not putting all your eggs in one basket. By investing in many
companies the mutual funds can protect themselves from unexpected drop in value of
some shares. The small investor cannot achieve wide diversification on his own
because of many reasons, mainly funds at his disposal. Mutual funds on the other
hand, pool funds of lakhs of investors thus can participate in a large basket of shares
of many companies. Majority of people consider diversification as the major strength
of mutual funds.
2) Expertise Supervision
Making investments is not a full time assignment of investors. So
they can hardly have a professional attitude toward their investment. When investor buys
a mutual fund scheme, an essential benefit one acquires is expert management of the
money he puts in the fund. The professional fund managers who supervise fund’s
portfolio take desirable decisions viz., what scrips are to be brought, what investments are
to be sold and more appropriate decision as to the timings of such buy and sell. They
have extensive research facilities at their disposal, can spend full time to investigate and
can give the fund a constant supervision. The performance of mutual fund schemes, of
course, depends on the quality of fund managers employed.
3) Liquidity of Investment
A distinct advantage of mutual fund over other investment is that
there is always a market for its units/shares. Moreover, Securities and Exchange Board of
India requires that mutual funds in India have to ensure liquidity. Mutual fund units can
either be sold in the share market as SEBI has made it obligatory for closed end schemes
to list themselves on stock exchanges. For open ended scheme investor can always
approach the fund for we purchase at net asset value(NAV) of the scheme. Such
repurchase price and NAV is advertised in news paper for the convenience of investors.
4) Reduced Risks
Risk in investment is as to recovery of the principle amount and as
to return on it. Mutual fund investment on both fronts provide a comfortable situation for
investors. The expert supervision, diversification and liquidity of units ensured in mutual
funds minimize the risks. Investors are no longer expected to come to grief by falling
prey to misleading and motivating “head lines” leads and tips if they invest in mutual
funds
5 )Safety of Investments
Besides depending on the expert supervision of funds managers,
the legislation in a country (like SEBI in India)also provides for the safety of
investments .Mutual Funds have to broadly follow the laid down provisions for their
regulation. SEBI acts as a watch dog and attempts whole heartedly to safeguard
investor interests.
6) Tax Shelter
Depending on the schemes of mutual funds, tax shelter is also available.
Like in India for equity linked schemes of mutual funds under section 88,tax rebate
upto twenty percent of investment(upto RS.10000)is available. Under Section 80L
income from mutual funds dividends along with other specified incomes,upto
RS.10000 is exempted from tax. Such provisions vary from country to country.
7) Minimise Operating Costs
Mutual Funds having large investible funds at their disposal avail
economies of scale. The brokerage fee or trading commission may be reduced
substantially. The reduced operating costs obviously increase the income available
for investors.
Investing in securities through Mutual Funds has many advantages over
organizing a personnel portfolio in a do-it-yourself style. Many other advantages are
capital appreciation, regular returns etc. Mutual Funds are also relevant in national
 interest. The test of their economic efficiency as financial intermediary lies in the
extent to which they are able to mobilise additional savings and channelising to more
productive sector of the economy.

Mutual Funds for whom?

These funds can survive and thrive only if they can live up to the hopes and trust
of their individual members. These hopes and trust echo the peculiarities with support
the emergence and growth of such institutions irrespective of the nature of the economy
where these are to operate. Mutual Funds come to the rescue of those people who do not
excel at stock market due to certain mistakes they commit which can be minimized with
Mutual Funds. Such mistakes can be viz., lack of sound investment strategies, un
reasonable expectations of making money, untimely decisions of investing or
disinvesting, acting on advise given by others, putting all the eggs in one basket, that is,
failure to diversify. Mutual Funds come to the rescue of such investors who face the
following constraints while making direct investments:
1. Limited resources in the hands of investors quite often take them away from stock
market transactions.
2. Lack of funds forbids investors to have a balanced and diversified portfolio.
3. Lack of professional knowledge associated with investment business unables
investors to operate gainfully in the market .Small investors can hardly afford to
have expensive investment consultations.
4. To buy shares, investors have to engage share brokers who are the members of the
stock exchange and have to pay their brokerage
5. They hardly have access to price sensitive information in time.
6. It is difficult for them to know the developments taking place in share market and
corporate sector
7. Firm allotments are not possible for small investors when there is a trend of over-
subscription to public issues.