Mutual Fund

A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest .Different investment avenues are available to investors. Mutual funds also offer good investment opportunities to the investors. Like all investments, Mutual Funds also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking Mutual Fund investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.

Different Kinds of Mutual Funds :-

Money Market Funds :

These funds are a great place to park your money. Whether you're storing money for emergencies, saving for the short-term, or looking for a place to store cash from the sale of an investment, money market funds are a safe place to invest. These funds invest in short-term debt instruments and typically produce interest rates that double what a bank can offer in a checking account or savings account and rival the returns of a CD (Certificate of Deposit).

Bond Funds :

Bond funds carry more risk than money market funds are often used to produce income (useful in retirement) or to help stabilize a portfolio (diversification). The primary types of bond funds are:
>>Municipal Bond Funds - uses tax-exempt bonds issued by state and local governments (these funds are non-taxable).
>>Corporate Bond Funds - uses the debt obligations of U.S. corporations
>>Mortgage-Backed Securities Funds - uses securities representing residential mortgages.
>>U.S. Government Bond Funds - uses U.S. treasury or government securities
Another way bond funds are often classified is by maturity, or the date the borrower (whether it be the bank, the government, a corporation or an individual) must pay back the money borrowed. Using this classification bonds are often called short-term bonds, intermediate-term bonds, or long-term bonds.

Stock Funds :

Stocks funds are considered riskier than bond funds (although certain bond funds can be very risky) and are used for growing your money. Money market funds and bond funds typically provide returns just a percentage or two above inflation, but stock funds should do much better over long periods of time

Selecting a mutual fund :

Picking a mutual fund from among the thousands offered is not easy. The following is just a rough guide, with some common pitfalls :

1. Check with your tax advisor prior to investing in a tax-exempt or tax-managed fund.
2. Match the term of the investment to the time you expect to keep it invested. Money you may need right away (for example, if your car breaks down) should be in a money market account. Money you will not need until you retire in decades (or for a newborn's college education) should be in longer-term investments, such as stock or bond funds. Putting money you will need soon in stocks risks having to sell them when the market is low and missing out on the rebound.
3. Expenses matter over the long term, and of course, cheaper is usually better. You can find the expense ratio in the prospectus. Expense ratios are critical in index funds, which seek to match the market. Actively managed funds need to pay the manager, so they usually have a higher expense ratio.
4. Sector funds often make the "best fund" lists you see every year. The problem is that it is usually a different sector each year (internet funds, anyone?). Also, some sectors are vulnerable to industry-wide events (airlines do come to mind). Avoid making these a large part of your portfolio
5. Closed-end funds often sell at a discount to the value of their holdings. You can sometimes get extra return by buying these in the market. Hedge fund managers love this trick. This also implies that buying them at the original issue is usually a bad idea, since the price will often drop immediately.
6. Mutual funds often make taxable distributions near the end of the year. If you plan to invest money in the fund in a taxable account, check the fund company's website to see when they plan to pay the dividend; you may prefer to wait until afterwards if it is coming up soon.
7. Research. Read the prospectus, or as much of it as you can stand. It should tell you what these strangers can do with your money, among other vital topics. Check the return and risk of a fund against its peers with similar investment objectives, and against the index most closely associated with it. Be sure to pay attention to performance over both the long-term and the short-term. A fund that gained 53% over a 1-yr. period (which is impressive), but only 11% over a 5-yr. period should raise some suspicion, as that would imply that the returns on four out of those five years were actually very low (if not straight losses) as 11% compounded over 5 years is only 68%.
8. Diversification can reduce risk. Most people should own some stocks, some bonds, and some cash. Some of the stocks, at least, should be foreign. You might not get as much diversification as you think if all your funds are with the same management company, since there is often a common source of research and recommendations. Too many funds, on the other hand, will give you about the same effect as an index fund, except your expenses will be higher. Buying individual stocks exposes you to company-specific risks, and if you buy a large number of stocks the commissions may cost more than a fund will.
9. The compounding effect is your best friend. A little money invested for a long time equals a lot of money later.

The Benefits of Mutual Funds:

A mutual fund pools money from many investors who share the same investment objective as the fund. Mutual funds give everyday investors a variety of investment opportunities. For people who don't have the knowledge, time or money to create a portfolio of individual securities, mutual funds offer important benefits.

Professional management - Investors benefit from the knowledge and experience of professional investment managers who are dedicated to security analysis, evaluation and selection.
Liquidity - Investors have immediate access to their money by selling shares at the fund's net asset value, which is determined at the end of each trading day.
Diversification - Not "putting all your eggs in one basket" is an important way to limit risk. Because mutual funds generally invest in a wide range of securities, like stocks and bonds, they provide immediate diversification. And because mutual funds are sold in shares, no matter how much you invest, you own a proportionate amount of all the fund's holdings.
Simplicity - Custody, tax reporting and record-keeping are among the many ser-vices mutual fund companies provide in a highly cost-effective manner. Many also provide investors with a wide array of shareholder services, including quarterly reports, duplicate statements, fund performance updates and extended hours during tax season.
Study the route - There are over 10,000 mutual funds available to investors! If you're new to investing, you might feel overwhelmed. But don't worry-most mutual funds can be classified into three broad categories according to the type of financial assets they hold. These categories offer different levels of investment risk. A good guideline: the higher the risk, the higher the potential return, and the lower the risk, the lower the potential return.
Money Market Fund - A mutual fund whose portfolio is made up of short-term (usually 90 days or less), low risk securities, such as commercial paper (i.e., short-term corporate IOUs) or certificates of deposit. Because they are low risk, they tend to offer lower returns.
Bond Fund - A mutual fund whose portfolio is made up of mostly fixed-income securities (i.e., bonds). While there are various types of bond funds, most offer low to moderate levels of both risk and return
Stock Fund - A mutual fund whose portfolio is made up of mostly stocks. In exchange for higher risk, the fund's objective is usually geared towards earning higher returns.

Turnover :

Turnover is a measure of the amount of securities that are bought and sold, usually in a year, and usually expressed as a percentage of net asset value. It shows how actively managed the fund is. A caveat is that this value is sometimes calculated as the value of all transactions (buying, selling) divided by 2; i.e., the fund counts one security sold and another one bought as one "transaction". This makes the turnover look half as high as would be according to the standard measure. Turnover generally has tax consequences for a fund, which are passed through to investors. In particular, when selling an investment from its portfolio, a fund may realize a capital gain, which will ultimately be distributed to investors as taxable income. The very process of buying and selling securities also has its own costs, such as brokerage commissions, which are borne by the fund's shareholders.

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