Advantages of Mutual Funds

Advantages of Mutual Funds

The Association of Mutual Funds in India (AMFI), a non- profit organization serving the cause of mutual funds, has listed the following advantages to the investors in mutual funds.

Professional Management

Experienced fund managers supported by a research team, select appropriate securities to the fund. The forecasting of the market is done effectively.

Diversification

Mutual funds invest in a diverse range of securities and over many industries. Hence, all the eggs are not placed in one basket. Normally an investor has to have large sum of money to achieve this objective, if he invests directly in the stock market. Through mutual funds, he can achieve diversification of portfolio at a fraction of the cost.

Convenient Administration

For the investors there is reduction in paper work and saving in time. It is also very convenient. Mutual funds help in overcoming the problems relating to bad deliveries, delayed payments and the like.

Return Potential

Medium and the long term mutual funds have the potential to provide high returns.

Low Costs

The funds handle the investments of a large number of people, they are in a position to pass on relatively low brokerage and other costs. This is because the funds can take advantage of the economies of scale.

Liquidity

Mutual funds’ provide liquidity in t ways. In open-end schemes, the investor can get back his money at any time by selling back the units to the fund at NAV related prices. In closed-end fund, he has the option to sell the units through the stock exchange.

Transparency

Mutual funds provide information on each scheme about the specific investments made there under and so on.

Flexibility

Currently most funds have regular investment plans, regular withdrawal plans and dividend reinvestment schemes. A great deal of flexibility is assured in the process.

Choice of Scheme

Mutual funds offer a variety of schemes to suit varying needs of the investors.

10. Well — Regulated

The funds are registered with the Securities and Exchange Board of India and their operations are continuously monitored.

Sharpe’s Performance Index

Sharpe’s performance index gives a single value to be used for the performance ranking of various funds or portfolios. Sharpe index measures the risk premium of the portfolio relative to the total amount of risk in the portfolio. This risk premium is the difference between the portfolio’s average rate of return and the riskless rate of return. The standard deviation of the portfolio indicates the risk. The index assigns the highest values to assets that have best risk-adjusted average rate of return

The details of two hypothetical funds A and B are given below

The larger the S. better the fund has performed. Thus, A ranked as better fund because its index .457> .427 even though the portfolio B had a higher return of 13.47 per cent. It is shown in Figure. The reason is that the fund ‘B’s managers took such a great risk to earn the higher returns and its risk adjusted return was not the most desirable. Sharpe index can be used to rank the desirability of funds or portfolios, but not the individual assets. The individual asset contains its diversifiable risk.