Published On: Fri, Apr 8th, 2011

Mutual funds ,its advantages and disadvantages

A mutual fund is a professionally-managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.

Advantages and disadvantages of mutual funds

Mutual funds have advantages compared to direct investing in individual securities. These include:

  • Diversification
  • Ability to redeem daily at net asset value (the value of a proportional share of the fund’s assets)
  • Professional investment management
  • Ability to participate in investments that may be available only to larger investors
  • Government regulation

Mutual funds have disadvantages as well, which include:

  • Fees
  • Less control over timing of recognition of gains and losses
  • Less predictable income
  • No opportunity to customize

Performance of Mutual Funds  in  India,2010

According to the Association of Mutual Funds in India (Amfi), the industry’s average asset under management (AAUM) stood at Rs 6,58,914 crore (SBI MF did not declare its AUM till the copy was released), as against Rs 7, 47, 204 last year.

Industry experts say the primary reason for the dip could be outflows from the ultra-short-term funds after the mark-to-market norms were introduced in the middle of the last financial year.

The Securities and Exchange Board of India (Sebi) had mandated that debt securities with maturity of up to 182 days be valued at their weighted average market price from August 1 rather than the earlier practice of valuation on the basis of amortization. Ultra-short term funds or liquid-plus schemes have a maturity of over 91 days.

Liquid-plus funds were favoured by firms and banks as they generated annual returns of 5.5 per cent, while liquid schemes and banks’ short-term fixed deposits could give just 4.25 per cent.

Almost half of the 43 players in the industry reported decline in assets.

Among the top five players which control 70 per cent of the total assets, UTI MF was hit the hardest as its AAUM plunged over 16 per cent.

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