Q&A; 1. 2. What are the benefits to small investors of investing via mutual fund

ID: 2780679 • Letter: Q

Question

Q&A; 1. 2. What are the benefits to small investors of investing via mutual funds? What are the costs? What are the advantages and disadvantages of exchange-traded funds versus mutual funds? re some differences between hedge funds and mutual funds? What are the types of mutual funds? Open-end equity mutual funds find it necessary to keep a significant percentage of total investments, typically around 5% of the portfolio, in very liquid money market assets. 4. 5. ash-equivalent" securities What difference between open-end and closed-end funds might account for their differing policies? What are some comparative advantages of investing your assets in the following: 6. 4 a. Unit investment trusts b. Open-end mutual funds. c. Individual stocks and bonds that you choose for yourself.

Explanation / Answer

Answer 1: Mutual funds have gained popularity among small investors because of the ease involved in investing in Mutual Funds. They do not only offer investors to start with nominal denomination it also benefits investors with lesser knowledge of market.

Also a small investor gets to diversify his minimal investments and liquity always remains a plus for them.

The costs associated with investing in mutual funds are generally operating expenses and loads.
Loads also know as Entry Loads & Exit Loads are fees paid when investors purchase or sell the shares.

Answer 2:

Advantages:
• Exchange Traded Funds (ETFs) can be traded like stocks hence giving them flexibility of being bought and sold throughout the trading day as the price fluctuates and can be bought on margin, sold short, or traded using stop orders and limit orders.
• Unlike mutual funds, ETFs do not have to hold cash or buy and sell securities to pay fund investors when redemption is requested.
• Annual expenses and trading costs associated with ETFs are usually lower than non-index mutual funds.
• ETFs typically have lower annual taxable distributions because they trade less frequently than mutual funds.
• ETFs may allow you to diversify your portfolio into additional sectors of the market such as commodities

Disadvantages:
• Repeated purchase of ETF’s attract repeated commissions make it expensive and less profitable when compared to Mutual funds
• Selling an ETF’s might be difficult when Market is behaving volatile, whereas selling Mutual funds is easier
• Due to poor index tracking of Some ETF’s they might be cost inefficient and involve a lot of risk whereas Mutual funds due to its diversified nature involves lower risk and cost.

Answer 3:

Hedge Funds

Mutual Funds

Focus is on Absolute returns

Mutual Funds focus on relative returns

Investments can be done in asset class, depending on investors desire and risk appetite

Investment is restricted to risk controlled frame work designed by regulator and hence risky portfolios may not be available for investment

Highly concentrated portfolios

Diversified Portfolios

Available for niche audiences with certain pre defined income

Available for general public

Answer 4:

Types of Mutual Funds based on investment objectives are:

Growth funds: Money is invested primarily in equity stocks with the purpose of providing capital appreciation. Since investments are in equity funds these are cinsidered to be risky in nature and are meant for long term investments

Income funds: Money is invested primarily in fixed-income instruments e.g. bonds, debentures etc. with the purpose of providing capital protection and regular income to investors.

Liquid funds: They are considered to be low on risk with moderate returns and are ideal for investors with short-term investment timelines,In these funds money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity

Tax-Saving Funds (ELSS): These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.

Capital Protection Funds: These are funds where funds are are split between investment in fixed income instruments and equity markets. This is done to ensure protection of the principal that has been invested.

Fixed Maturity Funds: Fixed maturity funds are those in which the assets are invested in debt and money market instruments where the maturity date is either the same as that of the fund or earlier than it.

Pension Funds: Pension funds are mutual funds that are invested in with a really long term goal in mind. They are primarily meant to provide regular returns around the time that the investor is ready to retire. The investments in such a fund may be split between equities and debt markets where equities act as the risky part of the investment providing higher return and debt markets balance the risk and provide lower but steady returns. The returns from these funds can be taken in lump sums, as a pension or a combination of the two.