Question

Discuss the Mutual Fund Industry and their role in the stock market.

Answer 1

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who deliver capital gain or income to investor.

Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments. Mutual funds charge annual fees , and, in some cases, commissions, which can affect their overall returns.

Advantages of Mutual Fund

• Increased diversification. This diversification decreases risk.
• Professional investment management:
• Regulated -  Mutual funds are regulated by a governmental body.
• Transparency and ease of comparison: All mutual funds are required to report the same information to investors, which makes them easier to compare to each other.
• Lower cost: The cost of a single investor to buy a stock or a bond is lower than investing individually.
• Flexibility: Mutual funds enables changes portfolio with market conditions change

- Role of Mutual Funds

1. As Financial Intermediaries

The funds collected from investors are handled actively by mutual fund managers, who purchase assets for stockholders as per their discretion. The companies that are invested in, benefit from the capital received and hence improve their performance, which prompts investors to entrust capital again. This is a cyclic process providing mutual benefit to shareholders and companies, which maintains financial stability and market liquidity..

2 Forefront in helping the development of the financial sector:

Mutual fund has significantly contributed to the development of the financial sector in the world. Mutual fund investments pool resources from investors – small or big – and thus increase the participation in the market. Also, with good return generation attracts new investors to invest and for old ones to reinvest. Thus, overall development of the financial sector.

3 It has become a major source of investment:

It is interesting to see that majority of the salaried population of India tends to invest in Mutual Funds. One of the major reason behind it is the diversification of the fund schemes that allows more investors to come in and invest. .

c. House Hold Savings in Investments:

Mutual funds have been leading light in the investment sector. What is exciting to see here that a large chunk of money funneled in Mutual funds are from the household savings. Investors are gradually opting for Mutual funds over investing in physical assets.