How safe are mutual fund investments

Tuesday, August 9, 2011

How safe are mutual fund investments

Mutual fund investments might be less risky than stock investments but nevertheless it has a potential for risk. Mutual fund application form clearly comes with a warning clipping at the bottom, which says that ‘investments are subjected to risk’. Yes, the risk factor is clearly far lower, considering that mutual fund also generates quite a handsome profit, if the market is on a bull run.

However, it is important that mutual fund investors should keep in mind the earning limits of a mutual fund. Before understanding the basics of mutual fund earning potential, one must also understand what exactly a mutual fund is.

Mutual Fund and a fund manager

Mutual fund is a collection of stocks. There are many stocks carefully selected by fund manager. He chooses stocks according to his investment strategy, and the collection of stocks is the reflection of his strategy. A fund manager is a person entrusted by the board to act as a caretaker, and is responsible for the running of affairs. He is responsible for investing the collected fund in the right channel to derive profit for investors. A Mutual fund manager is also the one who makes careful planning of the execution of fund in phases. 

How profitable Mutual fund is for investors

There are many ways through which investors can choose funds. Some funds come with a lock-in period. A three year lock-in period Mutual fund will lock the funds, and an investor will not be able to withdraw money from the fund. In such circumstances, he will have to wait till the end of the 3 year tenure, and will have to accept the share of profit or losses, which has cropped out of his investment. Not 100% of the invested amount is pushed through risky channels. Some part of a mutual fund has a guaranteed return of 10%, or whatever, the Mutual fund Company has fixed for the investors.

Rest of the amount is channelized through different company shares and stocks. The main profit of the fund is dependent upon how such segment performs, the better the performance, the better the profit.

Advantages of lock-in period Mutual Fund

Investors should also be wary about stock index. It is hard to explain through one article, how to invest on Mutual fund, but there are many Mutual fund investors who do not prefer the lock-in period. The main advantage of lock-in period fund is the elimination of exit load. On funds that do not have a lock-in period, there is an exit load attached during the redemption of funds.

Investing on Mutual funds without lock-in period

When an investor decides to put his hard earned dime on funds without any lock-in period, then he has chosen a more flexible option. He can safely withdraw his money, along with the profit, if the stocks have hit high. 

The other big advantage associated with Mutual fund investment without a lock-in period is the fact that an investor can choose his own time and push his money. When the stocks are down, he can safely push his savings, and then when the stock rises, he can withdraw them to make profit. However, an investor should be almost certain that his call of action will make him richer. A Mutual fund investor should be informed of the stocks where the fund manager has pushed the money, so that he can track the performance of the industry. An investor should know the Mutual Fund holdings and that is how he will be able to track the future performance of his investment.

Both Mutual funds with locking period and without a lock-in period has its advantages. An investor is advised to use lock-in period if his savings are lying without any use.

No comments:

Related Posts Plugin for WordPress, Blogger...