Page 131 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes the latter, it is unlimited. Also, a corporation enjoys the status of separate legal entity that can act
on its own behalf. A trust has to work on behalf of its trustees. Indian banks operating mutual
funds had made a convincing plea before the government to allow their mutual funds to
constitute them as ‘Asset Management Companies.’

Advantages of Investing in Mutual Funds

1. Investment variety and spread in different industries.
2. Capital appreciation without having to watch the upward or downward performance
curves of different scrips.
3. No impulsive decision making regarding purchase or sale of share/securities, since the
funds are managed by expert, professional fund managers who have access to the latest
detailed information regarding the stock market and individual scrips.
4. Liquidity through buyback arrangements of the mutual fund or listing on some stock
exchanges after a certain lock-in period.
5. Even the smallest dividend or capital gain gets reinvested, thus enhancing the effective
return.
6. Freedom from paperwork.
7. Tax benefits on invested amounts/returns or dividends/capital gains.

Drawbacks of Mutual Funds

Mutual funds have their drawbacks and may not be for everyone:
1. 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.
2. 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.
3. 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.
4. 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.

Types of Mutual Fund Schemes

A wide variety of mutual fund schemes exist to cater to the needs such as financial position, risk
tolerance and return expectations etc. The following gives an overview into the existing types of
schemes in the industry.
1. By Structure
(i) Open-ended schemes
(ii) Close-ended schemes
(iii) Interval schemes

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