The popularity of mutual funds is very well known among the investors. The mutual funds have grown significantly over the past few decades. The pace at which they have been accepted by investors all around the globe is commendable. The main reason behind the success of mutual funds is their structure.
Mutual funds provide the investors an easy way to make an investment in a very well diversified portfolio. If put in simple terms mutual funds provide their services by making investment easier for small investors.
Although the fact that mutual funds provide the ease in investment cannot be denied, there are certain weaknesses in the structure of mutual funds. Mutual funds may “hard sell” their services and they may not multiply your investments in the manner as they claim.
Structure of a Mutual Fund
The technical term for mutual funds is Collective Investment Schemes (CIS) because they provide the investors with a collective platform to make investments. The capital of the investors is held by mutual funds on their behalf, and they use these funds in making investments. The returns earned from investments are distributed among the investors after accounting for the operating fees and service charges. Investors can invest via these schemes by purchasing the units issued by these schemes. The unit price is determined by the net asset value of these schemes.
Things to Know before Investing in Mutual Funds
Investors need to be highly skeptical before making an investment in these schemes. Advertisements by these schemes may not be true at times, and investors may end up losing their money if proper research is not done. Following are the some of the aspects that must be considered:
- Validity of the Investment Portfolio: It is highly important that investors check the validity of the investment portfolios before purchasing the units of a mutual fund. A profitable mutual fund holds a diversified investment portfolio which is in accordance with the category of the scheme.
- Category of Mutual Fund: The common categories of investment schemes are; income fund, balanced fund, or another fund based on the investment avenues in which it makes investments.
- Extent of Operating Costs: The extent of return distributed by a scheme to its unit-holders depends mainly upon the proportion it deducts from investment earnings against operating costs and service charges. These costs are usually charged as a fixed percentage of the net assets. Investors should ensure that these charges are within the normal range.
- Front-End Load and Back-End Load: Unit-holders are required to incur additional expenses while purchasing or redeeming the units and these additional expenses are called front-end load and back-end load. Each scheme has different percentage for these loads. It should be ensured by investors that these charges are within the normal range.
Thus, where mutual funds provide easy access to a diversified portfolio, there are a number of complications that an investor may have to face. It can be said that mutual funds can be actually beneficial for investors if the investors act rationally and choose the right investment schemes.