Mutual Funds
What is Mutual Fund?
A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don’t have to figure out which stocks or bonds to buy).
How it Works?
A mutual fund is a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company. For an individual investor, having a diversified portfolio is difficult. Mutual funds helps the individual investors to invest in equity and debt securities simultaneously. When investors invest a particular amount in mutual funds, he becomes the unit holder of corresponding units. In turn, mutual funds invest unit holders’ money in stocks, bonds or other securities that earn interest or dividend. This money is distributed to the unit holders. If the fund gets money by selling some stocks at higher price the unit holders are liable to get the capital gains.
WHY INVEST IN MUTUAL FUNDS
Portfolio Diversification / Risk Diversification
Most Mutual Funds invest in 50 to 100 different Scrips based on market
capitalization, sectors and scheme objective. Only on a rare occasion do all stocks decline at the same time and in the same proportion. Hence, Mutual Funds offer a diversified investment portfolio even with a small amount of investment that would otherwise require big capital.
Professional Management
Mutual Fund schemes are managed by qualified experienced professionals who work towards the fund’s defined objective. These financial experts are accompanied by a specialized investment research team. The experts and their teams diligently and judiciously study companies, their products and performance.
Affordability
A mutual fund invests generally buy and sell various asset classes in large volumes allowing investors to benefit from lower trading costs. Investors can get exposure to such portfolios with an investment as modest as Rs.500/- in mutual funds through a Systematic Investment Plan. Such small portfolio would otherwise be extremely expensive to purchase and maintain for an investor investing directly in stock market.
Liquidity
With open ended funds, investors can redeem (encase) all or part of their investments at prevailing net asset value, at any point of time. Mutual Funds are more liquid than most investments in shares, deposits, and bonds.
Transparency
Mutual Funds are the most transparent form of investment. Investors receive detailed information and timely updates about the nature of investments made, fund manager’s investment strategy behind the investments, the exact amount invested in each type of security, etc. Moreover, the performance of a Mutual Fund is reviewed by various publications and rating agencies, making it easy for investors to compare one fund to another.
Rupee-cost Averaging
Rupee cost averaging or SIP provides the investor a disciplined approach of investing specific amount at regular intervals regardless of the unit price of the investment. Therefore, the money invested fetches more units when the price is low and lesser when the price is high. Thus, allowing you to achieve a lower average cost per unit over time. The strategy helps smoothen out market ups and downs in the long run, while reducing the risk of investing in volatile markets.
Regulations
All Mutual Funds are required to register with Securities Exchange Board of India (SEBI). With investor interest at the helm, SEBI has laid down strict regulations to safeguard investors against possible frauds. It is even mandatory for Mutual Fund distributors to register with Association of Mutual Funds in India (AMFI) and abide the norms laid by the Securities and Exchange Board of India (SEBI) and AMFI for the distributors.
Choice of Investment
Mutual Funds are the only product category that caters to every one’s needs. You will always find a mutual fund that matches your time horizon – long, medium, or short; and your risk-taking ability – low, medium, high. All this irrelevant of how much you invest, be it a very small investment or a huge Lumpsum. Your adviser will help choose the right fund/s for you keeping in mind your profile.
Minimizing Costs
Mutual Funds help investors to benefit from economies of scale as mutual funds pool money from vast number people with common interest and invest their money in the relevant asset class/classes. This helps the investors share the cost of management of their money.
