Pros & Cons of Investing in MF 1. Portfolio Diversification: Mutual funds normally invest in a well diversified portfolio or securities.

. Each i nvestor in a fund is a part owner of all the fund s assets. This enables him to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital. 2. Professional Management Even if an investor has a big amount of capital available to him, he benefits fr om professional management skills brought in by the fund in the management of th e investor s portfolio. The investment management skills, along with the needed rese arch into available investment options ensure much better return than what an in vestor can manage his own. Few investors have the skills and resources of their own to succeed in today s fast-moving, global and sophisticated markets, 3. Reduction / Diversification of risk An investor in a mutual fund acquires a diversified portfolio, no matter how sma ll his investment. Diversification reduces the risk of loss, as compared to inve sting directly in one or two shares or debentures or other instruments. When an investor invests directly, all the risk of potential loss is all his own. A fund investor also reduces his risk in another way. While investing in the pool of f unds with other investors, any loss on one or two securities is also shared with other investors. This risk reduction is one of the most important benefits of a collective investment vehicle like the mutual fund. 4. Reduction of transaction costs What is true of risk is also true of the transaction costs. A direct investor be ars all the costs of investing such a brokerage or custody of securities. When g oing through a fund, he has the benefit of economies of scale; the funds pay les ser costs because of larger volumes, a benefit passed on to its investors. 5. Liquidity Often, investors hold shares or bonds they cannot directly, easily and quickly s ell. Investment in Mutual Fund, on the other hand, is more liquid. An investor c an liquidate the investment, by selling the units to the fund if open-end, or se lling them in the market if the fund is closed-end, and collect funds at the end of a period specified by the mutual funds or the stock market. 6. Convenience & Flexibility Mutual fund management companies offer many investor services that a direct mark et investor cannot get. Investors can easily transfer their holdings from one sc heme to the other; get updated market information and so on. Moreover, Mutual Fu nds offer multiple schemes allow investors to switch easily between various sche mes. This flexibility gives the investor a convenient way to change the mix of h is portfolio over time. 7. Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. dependi ng upon the investment objective of the scheme. An investor can buy in to a port folio of equities, which would otherwise be extremely expensive. Each unit holde r thus gets an exposure to such portfolios with an investment as modest as Rs.50 0/-. This amount today would get you less than quarter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of investments thro ugh a mutual fund rather than investing directly in the stock market. Disadvantage of Mutual Funds: No control over cost Tailor made portfolios

Genesis MFs emerged in the USA many years' back because of the inefficiency of the banki ng system there. Banks would take money at deposit rates and lend it out to vari ous corporate investors. But there was a huge gap between the rates at which the y were willing to take money from individual investors and the rates at which th ey would lend to huge corporate borrowers. In such a situation a lot of retail i nvestors were willing to go out and lend directly to corporate borrowers. They f igured the risk was acceptable. Lots of corporate borrowers also felt that rathe r than borrow from banks at preposterous rates, they would do much better to acc ess individual investors directly. The catch was that the ticket size of individ ual investors was very small. For a corporate borrower to transact directly with individual investors would mean running up a towering transaction bill. This was when the concept of a mutual fund emerged, whereby an entity with very high levels of efficiency, no capital adequacy ratio's, extremely low costs and not maintaining any priority sector lendings or government bonds etc, could pool everybody's money together and lend it out to a AAA company. Of course, in such an eventuality the concept of getting a return guaranteed became endangered. Be cause individual investors in the mutual fund would then have to risk a portfoli o that some anonymous mutual fund manager put together. This brought in a new re quirement for diclosures. Investors who took such a risk wanted a very high leve l of transparency. They wanted disclosures at any given point in time. They want ed to know where their money was being invested.