Describe investment terms that are important to mutual fund buyers - Essay Example

Mutual Fund A Mutual Fund is a collective investment scheme which is managed by a group of professional experts. Many small investors in order to buyinstruments of short term money market, stocks and bonds and others securities invest in mutual fund to gain professional expertise from the investing companies as they lack the expert market knowledge (Mobius, 2007, p.1). Advantages and disadvantages The following advantages are available to the mutual funds investors: Increased diversification: The mutual funds increases the possibility of diversification of the investments as investors’ money is properly allocated in a set of varied portfolios.

Professional Expertise: The mutual fund provides investors with the chance to avail the expert choice in building the investment portfolio. Incremental Savings: In mutual funds investments does not need a large sum of money at once. So many small investors having small investments are encouraged to invest in mutual funds. (Northcott, 2009, p.101,104-106) On the other hand there are certain disadvantages as well associated with mutual fund. There is no opportunity for the investor to customize the funds as per their individual choice.

Another disadvantage of the mutual fund is that there is less possibility of predictable incomes available to the investors. Diversification of risk often marginally reduces the risk but more numbers of securities are to be added with a minimum costs are associated with each. Hence maintaining those involves a large cash outlay. Hence at times it creates a burden to the individual investors (Janjigian, Horan,CFA,Trzcinka, 2011). Investment objective as stated in the Mutual funds prospectus The prospectus is an important document which provides the investors with the details of firm’s policy, the extent of investment flexibility, also the current details of company’s performance along with its relative position in the industry.

The investment objectives of a particular fund vary from company to company and from fund to fund. The investment horizons can be short medium or long term, whereas the focus of the investment can either be debt, equity, bonds, forex or commodities. Before investing in a mutual fund, an investor is expected to study the prospectus and match his financial priorities and the risk taking ability that matches with that of a particular mutual fund (McGowan,n.d.). Difference between a managed fund and an index fund- better investment opportunity Managed funds have a goal to achieve above-average returns by appointing expensive managers and experts with exceptional market knowledge.

At times, a large majority of the highly managed mutual fund fails to give proper advantage to the investor. Whereas index funds merely aim to match the market. They do not hire expensive managers and are cheaper compared to the actively managed mutual funds. These funds mostly limit the number of trades and generally outperform the active mutual funds as they have a comparative cost advantage. Both these types of funds own from a diversified portfolio of securities and pools money from millions of investors and give them the advantage of diversification with small amount of investment.

But to avoid risk associated with mutual funds, index funds are more preferable as they have the ability to perform better in the market by being less expensive on one hand and on the other through close tracking benefits from the rise and fall of the market indices (Bumpus, 2009). Finally it may be said that the basic aim of the mutual fund is to obtain money from the small investors and channelize the investments so that the mutual fund company and the investor together share the fruits of profits.

References Bumpus, K, (2009), Managed Mutual Fund Vs Index Funds, retrieved on January 3, 2012 from: http://ezinearticles.com/?Managed-Mutual-Funds-Vs-Index-Funds&id=2338303 Janjigian, V. Horan, S.M.,CFA, Trzcinka, C., (2011), The Forbes/CFA Institute Investment Course: Timeless Principles for Building Wealth, John Wiley & Sons Mobius, M.,(2007), Mutual funds: an introduction to the core concepts, John Wiley & Sons McGowan,L.,(n.d.), Why read the mutual fund prospectus, retrieved on January 3, 2012 from:  http://mutualfunds.about.com/od/mutualfundbasics/a/prospectus.

htm Northcott, A., (2009), The Mutual Funds Book: How to Invest in Mutual Funds & Earn High Rates of Return safely, Altantic Publishing Company