ABOUT MUTUAL FUNDS
What is an investment fund?
An investment fund is an influx of capital contributed by numerous investors which
is pooled together and collectively used to purchase securities while each investor
holds rights and control of his own shares. Investing in a fund provides a wide
spectrum of investment opportunities, fund management by investment experts and
lower investment charges as compared to when the investors might be able to get
on their own. The risk of investment is comparatively less as it is divided over
many investors and there is no burden on an individual. Types of investment funds
include mutual funds, exchange-traded funds, money market funds and hedge funds.
What is a Mutual Fund?
A mutual fund is an investment fund that is made up of a pool of funds collected
from many investors like you for investing in securities such as stocks, bonds,
money market instruments and similar assets. Mutual funds are operated by professional
managers, who invest the fund's capital and attempt to produce capital gains and
income for the fund's investors. Investing in a Mutual Fund can be a lot easier
than buying and selling individual stocks and bonds on your own. Investors can freely
sell their holdings when they want, subject to exit loads prescribed by the fund
What are the types of Mutual Funds?
- To simplify Mutual funds, we can classify them into four broad categories, commodity,
debt, hybrid and equity.
- Commodity funds invest in commodities like gold, silver, oil, livestock and various
agricultural products. They help in protection from inflation and enhance diversification
to your portfolio.
- Debt funds invest in treasury bills, government securities, money market instruments
and other debt securities. These funds are fixed income securities and provide regular
and steady income to investors.
- Hybrid or Balanced funds are a mix of equity and debt and offer equity stocks and
bonds as underlying. As the name suggests this type of funds provide a balance between
security and high returns.
- Equity funds are ones which majorly invest in stocks. They are directly related
to market volatility and have the potential for high growth and returns but also
include an element of high risk.
Why invest in Mutual Funds?
Mutual funds offer a range of benefits to the individual investors. Let us look
at some of the key benefits which will provide testimony to why mutual funds are
one of the best to invest in and have become one of the top rated and most popular
investment vehicles today.
Mutual Funds are one of the best investment options for individual investors as
they do not need to track their investments every day. All they need to do is identify
the correct scheme that suits their requirements and invest in it. The fund manager
will manage the investors’ fund collectively by investing his professional expertise
and know-how to ensure that the scheme price (Net asset value –NAV) steadily increases
over time. The best fund managers manage the best fund and normally are visible
in the top 10.
Benefits of Scale
The buying and selling is in large volumes which allow investors to benefit from
lower trading costs. The smallest investor can get started on mutual funds because
of the minimal investment requirements. You can invest with a minimum of Rs.500
in a Systematic Investment Plan on a regular basis. This ensures that you are not
burdened by your investments and you can still get superior returns on investment.
Also, the other benefit is that if an individual wishes to invest in 10 quality
stocks and has a corpus of only Rs. 1000, he will not be able to buy all 10 (because
of higher prices). Through a structured vehicle like Mutual funds, one can easily
buy a portfolio of 30-50 stocks with an investment as low as Rs. 1000!
As the age old adage goes, “Don’t put all your eggs in one basket.” Mutual Fund
companies offer you investment options in different asset classes like- commodities,
debt, equity and hybrid with each having a different benefit for investor. Commodity
funds protect you against inflation. Debt funds provide steady returns on your investment.
Equity funds give you a possibility to earn high returns and finally hybrid funds
are mix of debt and equities. Even if you invest in each of the categories your
asset allocation is well diversified.
A Basket of goods which you can buy today in Rs. 100 will not cost the same in an
year from now. To protect the real worth of your hard-earned rupee, you need to
constantly deploy it in avenues, which will give you positive real returns i.e.
returns which will take care of Inflation. Returns on most of your traditional investment
avenues like Fixed deposits, gold etc just about match inflation or are below the
inflation rate. Hence, to generate real positive returns one needs to look at avenues
like Mutual Funds, Stocks, Real Estate etc.
Who can invest in Mutual Funds?
Anyone can invest in mutual funds whether be an individual or a body corporate.
Resident Indians, Non-Residents and even expatriates are eligible to invest in Mutual
funds. All categories have their own set of norms & procedures plus KYC requirements
to be followed for making investments in Mutual Funds.
When should I invest in mutual funds?
The sooner the better! The earliest you invest in mutual funds the more returns
you will earn over a long period of time. The moment you feel financially independent
you should start investing, as mutual funds on an average provide more returns on
investment as compared to other investment options like fixed deposits or savings
account. However, it is recommended that you define your financial objectives in
detail before investing in a mutual fund scheme.