Page 243 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes increasing in value. When a portfolio is balanced in this way, the value of the overall
portfolio should gradually increase over time, even if some securities lose value.

 Professional Management: Most mutual funds pay top-flight professionals to manage
their investments. These managers decide what securities the fund will buy and sell.
 Regulatory oversight: Mutual funds are subject to many government regulations that
protect investors from fraud.
 Liquidity: It’s easy to get your money out of a mutual fund. Write a cheque, make a call,
and you’ve got the cash.

 Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet.
 Low cost: Mutual fund expenses are often no more than 1.5% of your investment. Expenses
for index funds are less than that, because index funds are not actively managed. Instead,
they automatically buy stock in companies that are listed on a specific index.
 Transparency
 Flexibility

 Choice of schemes
 Tax benefits
 Well regulated

12.2.3 Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:
 No guarantees: No investment is risk-free. If the entire stock market declines in value, the
value of mutual fund shares will go down as well, no matter how balanced the portfolio.
Investors encounter fewer risks when they invest in mutual funds than when they buy and
sell stocks on their own. However, anyone who invests through a mutual fund runs the
risk of losing money.

 Fees and commissions: All funds charge administrative fees to cover their day-to-day
expenses. Some funds also charge sales commissions or ‘loads’ to compensate brokers,
financial consultants, or financial planners. Even if you don’t use a broker or other financial
adviser, you will pay a sales commission if you buy shares in a Load Fund.
 Taxes: During a typical year, most actively managed mutual funds sell anywhere from
20 to 70% of the securities in their portfolios. If your fund makes a profit on its sales, you
will pay taxes on the income you receive, even if you reinvest the money you made.
 Management risk: When you invest in a mutual fund, you depend on the fund’s manager
to make the right decisions regarding the fund’s portfolio. If the manager does not perform
as well as you had hoped, you might not make as much money on your investment as you
expected. Of course, if you invest in index funds, you forego management risk, because
these funds do not employ managers.

Self Assessment

Fill in the blanks:

5. Economic conditions like a rise in interest rates may cause certain securities in a diversified
portfolio to ....................................... in value.
6. ....................................... investment is risk-free.

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