A Mutual Fund is an investment vehicle operated by an Asset Management Company (AMC) and is required to be registered with SEBI (Securities and Exchange Board of India). AMC raises money from individual investors and invests the money on behalf of the investors or unit holders, in stocks, bonds, money market securities, options, futures, currencies, government securities etc., and distributes the profits to the investors. SEBI regulates mutual funds to protect the interests of the investors.
The mutual fund will have one or more fund manager(s), who will be responsible for investing the gathered money into specific securities (stocks or bonds). In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets. Even if you are new to stock market you can start with mutual funds since your investment fund hires a dedicated fund manager who manages the fund. The income earned through investments and capital gains is shared by the investors in proportion to the number of units owned by them.
Here, we choose fund’s strategy rather than investment. As an amateur investor, if you start with mutual funds, you will be able to manage your risk better than by going for individual trading. Here, you can clearly understand the operation of mutual funds.
Investors pool their money with —> fund managers —> invest in securities —> generate returns —> passed back to investors
Advantages of investing in mutual funds:
The most basic advantage of mutual fund is we buy multiple stocks rather than just one stock
Mutual funds provide the benefit of cheap access to expensive stocks. Mutual funds diversify the risk of the investor by investing in a basket of assets. You can buy a diversified basket of assets even for a small amount
A team of professional fund managers manages them
Being institutions that make substantial investments in markets, mutual funds have access to corporate managers, that individual investors cannot access
Mutual fund investors are protected by Govt. through SEBI. All mutual funds are registered with SEBI. So they function within the regulations designed to protect the interest of investors
Experienced and competent fund managers
Avoid mistakes that an individual investor would probably do
Exploit great opportunities better based on same information and logical decision support matrix
When you buy a mutual fund you hire an investment expert to multiply your money
You need not have expertise in making decisions regarding which stock is best to invest, because it is the duty of fund manager, he takes care of all this
You can easily redeem your shares whenever you want. Just like an individual stock, mutual fund allows you to request that for the stock to be converted into cash at any time
Investment in mutual funds offers a lot of flexibility like regular reinvestment plan regular withdrawal plans and dividend reinvestment plan that enables systematic investment plan
When you buy a single stock your entire investment depends on the success of only that particular stock. But if you buy mutual fund, you are buying many stocks by making a single purchase
Mutual funds earn returns from dividends on stocks, interest on bonds and the fund has a capital gain if the fund sells securities that have increased in price
For an individual investor who does not have time and expertise to analyse and invest in stocks and bonds, mutual funds are the best alternatives to secure more returns with limited investment. Simply investing in mutual funds reduces your investment risk.
Mutual funds are a sensible way to get involved with the stock market. Even if you don’t want to ever invest directly in stock market, a decent mutual fund is most likely to outperform investment in fixed deposits, gold and possibly real estate in the medium or long term. Ideal time frame to invest is at least 3 years but preferably 5 years or more. Unlike real estate you don’t need lakhs of rupees to get started. And unlike real estate, it is very easy to convert mutual fund asset into cash.
Mutual fund investments are not totally risk free but are a good investment options. What is required at your end is planning & identifying a right type of mutual fund and estimating how much money you can set aside for long term (3 to 5 years).
Money Chutney provides insightful articles on saving, investing, budgeting and financial planning. These articles are intended to provide knowledge and make people aware of methods and techniques on personal finance, so they can use it to better their financial situation. These personal finance strategies are targeted towards educated middle class people in India, who typically look for information on how to save money.