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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.
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