what are mutual funds? is it clever to invest in M.F's , pls guide me in this regard?

Question

iam a new person in this area

Answer 1

Some ok info on definitions of mutual funds in prior answers.

However, Mutual funds are not good and you should not invest in mutual funds unless you have to (like if it were a requirement in a 401K).

Here's why.

First of all, mutual funds exist to take average person's money.

Second, mutual funds seem to be "happy" just to do better than the S&P index, since that's often the gauge. A monkey, yes monkey, can usually outpick most mutual funds.

Third, mutual funds have embedded management fees in their costs. Most of these mgmt fees are 0.5% to 2% annually.

Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in not "losing" you lots of money.

Fifth, mutual funds are not as liquid as one might think. If you're in mutual funds and a Bush talks in the morning and you call your broker to sell because the market is now tanking, the broker will gladly take your order, but the order will not be executed until the day is over and the negative impact is already priced into the fund.

Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount of time, meaning you must keep your money in the fund 90 days to 2 yrs before you're free from the fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so of your money as well.

Seventh, mutual funds have to be in the market. So if the market is crashing or going down like it has between May and now, then the funds still have to be in the market and taking those losses too. With some practice, you can time your monies to avoid some of those losses (it'll take practice).

Convniced yet? Need more?

Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, they are probably in both the hot sectors and cold sectors. However, as an investor, you can buy into just the sectors you want, like metals, or housing, or energy, etc.

Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fund with $10 billion in assets. 1% of that money is $100 million. How many companies are this big where $100 million investment isn't the whole company? Do you want to limit yourself to just those larger companies like microsoft, at&t, home depot, cisco, ebay which have been sideways for years? I think not.

A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks, so are very liquid, and do not have the fees like the mutual funds. Further, you can buy/sell them as you wish. They represent sectors or indexes, so buying them gives you the same diversification as the sector/industry/index, but without the extra overhead!

See amex.com for more info (american stock exchange) or ishares.com, holders.com


You need to invest for yourself. If you can't, then sure, use mutual funds. But be aware of the shortcomings (and as you can see, there are many). Best of luck!

Let me know if you have further questions.

Answer 2

I believe you've already got answers from theory to contrarian views about investing in mutual funds.

Taking into consideration that you are new to investing in financial instruments, it's less risky to invest in mutual funds than investing directly in stocks. I believe that you are an Indian, if yes, you may contact a financial advisor such as stock broker etc or go thru' the website of SEBI or Association of Mutual Funds for more information.

Mutual Funds can be trated similar to Recurring Deposits with banks where you make periodic deposit with a bank, same can be done with MF units, only difference here is the risk profile of both investments, with bank it's less risk and less return and in case of MF, it's bit higher risk and higher returns.

Every financial instrument has its own strength and weakness, you need to choose the one which fits to your financial objectives. As such money can't earn on its own and you need to earn it.

Learning to invest in mutual funds is not rocket science, all you require is to understand the fundamentals, some money even a small amount would do and a periodic review of your investment and your knowledge etc.

Answer 3

a lot of information is already provided in the previous answers. One reason why it makes sense to invest in a Mutual Fund (provided you are comfortable with the investment strategy and portfolio mix) is that while you would need a buyer for your equity holding before you can dispose it off, in case of a Mutual Fund the fund manager has to give you back your money whenever you want it (there are some caveats to this, however).

And moreover, the fund manager has a lot of understanding of the market. So yes, investing in MFs is wise.

Answer 4

A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds and/or other securities. It is a good idea to invest in mutual funds rather than investing in individual stocks or bonds because you are hedging your risk through diversification. You may want to look at index funds also, which tend to have better long-term returns than mutual funds.

Answer 5

Gemelli2
Level 2

I suggest that you check out

"investopedia.com" , "investorwords.com"

mutual funds are a basket of stocks, so each "share" of a mutual fund represents holdings in -depending on the fund- anywhere from a few dozen to hundreds of companies.
There is normally a minimum amount to open a mutual fund
$3000-$5000 is pretty standard...
some have "loads"...up front sales charges of 3% to 6% [YIKES!!]
in addition, they have operating charges....these vary with the fund and the type of fund shares...see any prospectus

the easiest way to buy them
....brokerage houses and directly from the fund company

selling them, the same way....

although-and this is a fine point-your NAV for some funds is not determined until the close of that day's trading....not necessarily the time that you put the sell order in.


Mutual funds allow you to diversify your holdings....you can buy funds that target a specific type of company , size of company, location of [global] company...etc etc etc

However....ETFs and closed-end funds usually have cheaper operating expenses and do not have a minimum dollar amount to purchase...and there is an ETF and/closed-end fund that will match any mutual fund available...

for these, I suggest you refer to
Amex.com. CEFA.com ishares.com powershares.com


before you put a dime into anything.....read enough to have a really good idea of what you are buying.....

and don't be afraid to use stops/limits/stop limits to limit your losses and protect your gains

good hunting

Answer 6

Mutual funds are managed by a team of experts in finance & stocks, who understand the pulse of economy & Gov.policies. Their source is money of small investors. With big chunk of such accumulated money they can play in stock markets in a way that ordinary investor with limited resources can't. Now the international and indian bigwigs are in this MF business and there is competition between them to collect money from small investors like you & me. With right choice of such MF, you may make investments. Please remember that stock markets are speculative & risky.