Home » Research » Investment Knowledge Bank » Mutual Funds: What is Mutual Funds? Advantages of Mutual Funds

Chapter 3.1: What is mutual fund

Summary:

  • Mutual funds are a good investment option for investors with limited knowledge of the stock market.
  • These funds are professionally managed by asset management companies.
  • Even by investing low amounts, you can gain access to a variety of different assets.

Featured Snippet:

What is mutual fund?

A mutual fund is an investment instrument that is managed by professionals. It collects money from investors and invests on their behalf.

You may be keen on investing in stocks but are not sure of how the markets work. This is where mutual funds can be useful. Asset management companies (AMCs) handle mutual funds. These fund managers pool money from shareholders like you. They then invest it in various instruments including equities and bonds. The investments are made by an ‘asset management company’ or AMC.

For example, an equity fund would invest in stocks and equity-related instruments, while a debt fund would invest in bonds, debentures, etc.

As an investor, you put your money in financial assets like stocks and bonds. You can do so by either buying them directly or using investment vehicles like mutual funds.

Now, let us see what makes mutual funds special based on the following parameters.

Why choose mutual funds?

  • Professional money management:

    A mutual fund is managed by professionals. This makes it more insulated to risk. In AMCs, there are experts who handle your money. These money managers have real-time access to crucial market information. This allows them to execute trades on the largest and most cost-effective scale. Simply put, they have the know-how to trade in the markets that retail investors may not possess. Moreover, good investment managers are resourceful. They are capable of monitoring the companies the mutual fund has invested in compared to individual investors. (More here: How mutual funds work)

  • Low investment threshold:

    Fixed deposits or bonds may often ask for a minimum investment of Rs 20,000. This may not always work for you. But mutual funds have a much lower investment threshold. Even if you invest as little as Rs 1,000, the fund will accept it and invest it on your behalf. (Read more: How to start an SIP investment)

  • Transparency:

    When you are parting with your hard-earned money, you have every reason to be careful. You can trust mutual funds to operate in a regulated environment. The market regulator, Securities and Exchange Board of India (SEBI), oversees all transactions. It has taken steps to ensure that mutual funds conform to the rules laid down by it. Investors can track their investments at any time. They can also get periodic information as long as they remain invested.

Advantages of a mutual fund

Mutual funds have come a long way in India since its modest beginnings in 1964. Today, there are over 45 mutual fund organisations managing assets worth over Rs 10 lakh crore. They have become the preferred investment option due to the following reasons:

  • Ease of investment:

    Investing in mutual funds is simple and convenient. You save time on the additional paperwork that comes with every transaction. Such investments also reduce the hassles of researching the many stocks available in the market. You can leave the actual market-monitoring and conducting of transactions to your AMC. You can shop online for the mutual fund or place an order with your broker. If you are unhappy with the performance of your fund, you can easily look at other options. For example, you could move from one fund to another within a mutual fund family. This allows you to realign your portfolio to respond to significant fund management or economic changes.

  • Ample liquidity:

    With fixed deposits or bonds, you may get stuck until the sum matures. There is no such thing with a mutual fund. You can get your money back at any point at the prevailing net asset value (NAV). This will be possible if you have chosen an open-ended fund. (More here: How to calculate the NAV of a mutual fund)

  • Variety:

    Mutual funds give you a wide range of options. There’s a whole range of industries and sectors, different kinds of assets, and so on. You can find a mutual fund that matches just about any investment strategy you select. There are funds that focus on blue-chip stocks, technology stocks, bonds, or a mix of stocks and bonds. Simply pick the one which suits you the most. (Read more: Different kinds of mutual funds)

How to choose a mutual fund

Before investing in a mutual fund, do some homework. This will put you on a firm footing about what you can expect by investing in a particular scheme. Here is how to go about it.

(Read more: How to choose a mutual fund scheme)

  • Check track record:

    A track record of the fund could be a pointer of what to expect from it. There is no guarantee that a fund will continue to excel just because it did so in the past. But, a research on the past performance can throw some light on the past performance of the fund. This includes the prudence of the fund managers, investment philosophy of the fund, and the returns it has generated over a period of three years to five years.

  • Match fund’s risk with your profile:

    Mutual funds invest in various portfolios to reduce risk. Yet, there are a few equity schemes that invest in particular sectors alone. These schemes are classified as high-risk and have the potential to maximise return. Match the fund’s risk exposure with your profile before you choose to invest.

(More here: What is an equity fund?)

WHAT NEXT?

We are almost at the end. Before you start investing in mutual funds, there are a few more important points to keep in mind like taxation. This can affect your total financial returns. To know about these factors, Click here

Why Capital gains report?
  • Snapshot of profit/loss
  • Reflects performance of your portfolio
  • Helps compute taxes
Reach Us
Read about mutual funds investing

Read More >