What are Mutual Funds?
A mutual fund is a pool of money managed by professional Fund Manager(s).
This pool of money is ‘resides’ with a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. The ‘profit’ generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.
Here’s a simple way to understand the concept of a Mutual Fund Unit.
Let’s say that there are 5 friends wanting to eat some sweets. There is a box of 10 sweets costing ₹50. Five friends decide to buy the same, but they have only ₹10 each and only the box is available; the friends then decide to pool in ₹10 each and buy the box of 10 sweets. Now based on their contribution, they each receive 2 sweets or 2 units, if equated with Mutual Funds.
And how do you calculate the cost of one unit, or in our case a sweet? Simply divide the total amount with the total number of sweets: 50/10 = ₹5 per sweet.
This results in each friend being a “unit holder” in the box of sweets that is collectively owned by all of them, with each person being a part owner of the box.
Who Should Invest In Mutual Funds?
Mutual funds are ideal for investors who either lack large sums for investment, or for those who neither have the inclination nor the time to research the market, yet want to grow their wealth.
The money collected in mutual funds is invested by professional fund managers in line with the scheme’s stated objective. In return, the fund house charges a small fee which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI).
Mutual funds offer multiple product choices for investment across the financial spectrum. As investment goals vary – post-retirement expenses, money for children’s education or marriage, house purchase, etc. – the products required to achieve these goals vary too. The Indian mutual fund industry offers a plethora of schemes and caters to all types of investor needs.
Mutual funds offer an excellent avenue for retail investors to participate and benefit from the uptrends in capital markets. While investing in mutual funds can be beneficial, selecting the right fund can be challenging. Hence, investors should do proper due diligence of the fund and take into consideration the risk-return trade-off and time horizon or consult a professional investment adviser. Further, in order to reap maximum benefit from mutual fund investments, it is important for investors to diversify across different categories of funds such as equity, debt and gold.
While investors of all categories can invest in securities market on their own, a mutual fund is a better choice for the only reason that all benefits come in a package.
What are the benefits 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.
Mutual fund investments are becoming very popular with individual investors because of the benefits they provide. Some of the main reasons investors have started investing in mutual funds are:
- You can start with any amount (as low as ₹500 in most funds)
- Diversify across multiple stocks and other instruments like debt, gold etc.
- Start automated monthly or quarterly investments (SIP)
- Invest without requiring to open DEMAT account
Thus for most of us, who have neither the time nor the expertise to study markets in detail, mutual funds become the best route to invest and participate in the India growth story.