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.
A mutual fund is 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, real estate and other similar assets. These funds are operated by fund managers, who by investing in line with the specified investment objective attempt to create growth or appreciation of the amount for investors.
Types of mutual funds are:
> Equity funds – Those funds which invest only in stocks and other equity instruments are said as equity funds.
> Debt funds – Those funds which invest only in fixed income instruments are said as Debt funds.
> Money market funds -Those funds that invest only in short-term money market instruments are said as Money market funds.
> Hybrid funds – Those funds that divide investments between equity and debt to create a balance are said as Hybrid funds.
What is the benefit of investing in mutual funds?
The key advantage of investing in 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
some of the major benefits of investing in mutual funds are –
Liquidity
The most important benefit of investing in a Mutual Fund is that the investor can redeem the units at any point in time. Unlike Fixed Deposits,they dont have to wait for the time period to be completed . Mutual Funds have flexible withdrawal but factors like the pre-exit penalty and exit loads should be taken into consideration.
Diversification
The value of an investment may not rise or fall in tandem. When the value of one investment is on the rise the value of another may be in decline. As a result, the portfolio’s overall performance has a lesser chance of being volatile.
Diversification reduces the risk involved in building a portfolio thereby further reducing the risk for an investor. As Mutual Funds consist of many securities, investor’s interests are safeguarded if there is a downfall in other securities so purchased.
Expert Management
The experts manage and operate mutual funds. The experts pool in money from investors and allocates this money in different securities thereby helping the investors incur a profit. Every decision of entry and exit in market is done by experts .this is one of the major benefit of mutual fund .
Flexibility to invest in Smaller Amounts
Mutual Funds is flexible in nature. Investors need not put in a huge amount of money to invest in a Mutual Fund. It can be done in smaller amount as well.
Accessibility
Mutual Funds are easily accessible you canbuy mutual funds from anywhere in the world. An AMC offers the funds and distributes through channels like :
- Brokerage Firms
- Registrars
- AMC’S Themselves
- Online Platforms
- Agents and Banks
Schemes for Every Financial Goals
The best part of the Mutual Fund is the minimum amount of investment can be Rs. 500. And the maximum can go up to whatever an investor wishes to invest.
The only point one should consider before investing in the Mutual Funds is their income, expenses, risk-taking ability, and investment goals.
Safety and Transparency
With the introduction of SEBI guidelines, all products of a Mutual Fund have been labeled. This means that all Mutual Fund schemes will have a color-coding. This helps an investor to ascertain the risk level of his investment, thus making the entire process of investment transparent and safe.
This color-coding uses 3 colors indicating different levels of risk-
- Blue indicates low risk
- Yellow indicates medium risk, and
- Brown indicates a high risk.
Lowest Lock-in Period
Tax Saving Mutual Funds have the lowest lock-in periods of only 3 years. This is lower as compared to a maximum of 5 years for other tax saving options like FD, ULIPs, and PPF.
On top of that one has the option to stay invested even after the completion of the lock-in period.