True Or False: Investing Stocks And Mutual Funds Are Money Trees?

Introduction

What is a Mutual Fund? A Mutual fund is a pool of funds collected from different investors where their funds are invested in bonds, stocks and in are money market securities and similar instruments. A major part of the returns received by the invested money are returned to the investors after deducting the cost of running and maintaining the funds. Each investor has a proportionate holding of the fund in respect to the number of units held by him. The unit holders of a mutual fund receive dividends that are money earned by them in proportion to their holding as a return on their investment. There are three main ways to earn money from mutual funds. They are money earned in any of the following ways.

• The fund may distribute nearly all the dividend earned and interest received on stocks and bonds respectively.
• When the funds distribute a portion of the capital gains earned by selling any stocks or securities.
• Mutual fund unit holder sells the units at a price higher than his purchase price.

History

Are Mutual Funds Money Trees? The simple answer to this question is, “not always, but may seldom”. The money that you have put in a mutual fund is again invested by the fund managers in a volatile uncertain money market where high risks are associated with higher return. Investments in mutual funds are comparatively safe mode of investments with moderate returns. It is very common to go something wrong anytime and your investment may be eroded to a fraction of your total outlay. There are varieties of mutual funds on the basis of their investment pattern linked with their respective rate of return. Some of the funds invest largely on the safest forms of investment; there are others where fund is invested in high risk stocks and securities giving either high returns or complete negative yield. So, depending upon the nature of the fund and its performance, you may or may not get a consistent or windfall income.

Features

How to Choose the Correct Mutual Fund? There are more than 7500 mutual funds in India from 190 funds houses. The selection of a suitable mutual fund is as difficult as are money involvement in the fund. You have to select the proper funds according to your need at the same time amount of investment is also equally important. However, here is a guideline for your convenience:

• First you must know the purpose of your investment. May be there are money you want to invest for tax saving purposes or you want to save some in safe investment for your child’s education or marriage or you are planning to settle for a peaceful retired life. Your pattern of investment should be made accordingly.
• Risk Return Trade off: It is your risk bearing capacity. The higher risk is associated with higher returns.
• Diversified Portfolio: A mutual fund is relatively safe and less volatile which has a diversified folio where funds are money separated in different sectors like Pharma, Infrastructure, Industrial or Information Technologies, etc.
• Lower Expense Ratio: It is the expenses of annual expenses as a percentage of average net assets. If you have to choose between two similar funds you must go for the fund with lower expense ratio.
• Consistent performer: Always remember the old fable-slow and steady wins the race. Any fund giving 100% return may lure investors for further investment and may suddenly disappear or collapse any time. There are money always at risks.

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