Continuing the mutual fund tutorial, for whom is a mutual fund suitable? Well it is suitable for people who do not have ALL THE THREE :
- Lots of money
- Skills of stock picking, portfolio construction and fund management skills.
Then you go for mutual funds. Mutual funds give you the following advantages:
- Portfolio diversification – with a small amount of money you buy a lot of shares
- Professional management – a paid service which specialises in fund management
- Reduction/diversification of risk – share specific risk is completely removed
- Reduction of transaction costs – It is cheaper for a retail investor to invest through a mutual fund
- Convenience and flexibility – invest when you are earning, withdraw when you have retired.
Apart from these if you have maintained a portfolio of equity shares you realize the headaches of keeping track of dividends, rights issue, warrants exercise, etc.
However, mutual funds do not come without any disadvantages. Let us look at the Disadvantages
- No control over cost – if you do not like the cost of a fund you can go elsewhere , but you cannot negotiate.
- No tailor-made portfolio – you have to take the portfolio given by the fund manager.
- Managing a portfolio of fund – once it was thought you had to invest in one mutual fund and then relax. Now there is such a huge range of mutual funds that you need to create a portfolio of funds.
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