What is a mutual fund?
A mutual fund is essentially a common pool of money in which investors put in their contribution. This collective amount is then invested according to the investment objective of the fund.
The money could be invested in stocks, bonds, money market instruments, gold and other similar assets. These funds are operated by money managers or fund managers, who by investing in line with the specified investment objective attempt to create growth or appreciation of the amount for investors.
For example, a debt fund will have its specified objective to invest in fixed income instruments or products like bonds, government securities, debentures, etc. Similarly, an equity fund will invest in stocks and other equity instruments.
Some common categories of mutual funds are:
What is the benefit of investing in mutual funds?
One of the key advantages of investing in a mutual fund is that each investor (even with a small investment) gets access to professional money management and expertise. Also, it would be very difficult for an investor to create a diversified portfolio of investments on his own with a small amount of money. With mutual funds, each investor participates proportionally in the return the scheme generates.
Each unit gets a proportional share of gain (or bears loss) from the fund. There is a portfolio report generated for each investor, which tracks all investments and the returns generated by the mutual fund.
Advantages of Mutual Funds:
Diversification:
To diversify is to reduce risk. For example, let's say you buy milk from one milkman. If someday he falls ill, you won’t have any milk to drink! On the other hand, if you buy milk from two milkmen, If one falls ill, you'll still have supply from the other.
Professional Management:
Investing is obviously not an easy task. Investing, be it in shares, real estate, gold, bonds and so on depends on a multitude of factors that constantly need to be studied and understood.
Simplicity:
While investing, the availability of information and data is particularly time-consuming. If all the information would be easily available, investing would be much simpler.
You Can Start with a Small Amount:
Unlike other investments like real estate or stocks, mutual funds allow you to start as small as Rs 500. One can start with mutual funds with as low as Rs 500 or Rs 1000. Some funds, like Reliance Small Cap Fund allow you to start with just Rs 100.
Automated Investment:
Mutual funds are largely beneficial because one can invest with less money. The Systematic Investment Plan or SIP is an excellent example wherein the money gets automatically debited from your account. You can choose a fund that suits your investing goal.
Safe and Transparent:
Investments in mutual funds are very transparent. All mutual fund companies come under the purview of SEBI and they need to make necessary disclosures.
Option to Choose SIP or Lumpsum:
Mutual funds also give you the flexibility to invest through SIP (systematic investment plan) or lump sum
Match Your Style:
If you have more knowledge about certain industries or sectors, but don’t have enough expertise to know which company to invest in, you can make use of sector mutual funds.
