Mutual Funds
What are Mutual Funds
A mutual fund pools in money from a large number of investors and invests it in securities like stocks, bonds, money market instruments etc. based on fund’s objective. The investment is managed by professional investment managers who decide what securities to buy and sell on behalf of individual investors. When the fund makes profit, mutual fund investors get a share in these profits, in proportion to the money invested by them.
Individually, a small investor lacks the knowledge and resources to beat the market consistently. When several small investors pool in their money and hire a professional manager, they can consistently earn higher returns.
The key advantages offered by mutual funds are enumerated in the next section.
Advantages of a Mutual Fund
Professional Management: Mutual funds are managed by professional fund managers, who are experts at tracking markets and managing investments. They identify the best securities to buy, the best time to buy these securities and most importantly the right time to sell these securities. These managers have access to critical market information and can execute trades in a cost-efficient manner due to the large scale of their transactions.
Affordable Portfolio Diversification: One of the key rules of prudent investment is diversification. “Do not put all your eggs in one basket” is a saying that rings truest for financial investments. In a diversified portfolio, if some securities underperform, stellar performances by other securities, make up for losses. Hence, diversification is a key tool for reducing investment risks.
Diversification is virtually impossible if you’re a small investor sans mutual funds. Through mutual funds, you can have a proportionate share in a well-diversified portfolio even for a small investment of Rs. 500.
Liquidity: Traditional investments typically have long lock-in periods.
Most types of mutual funds on the other hand do not have any lock-in periods. Investors can recover the market value of their investments from mutual funds themselves (in case of open-ended mutual funds) or from stock exchanges (in case of close ended mutual funds) whenever they desire.
Even tax-saving mutual fund schemes like Equity Linked Savings Schemes have very short lock-in periods of 3 years only.
Thus, mutual funds provide you the flexibility of liquidating your investments in case of emergencies.
Flexibility, Versatility and Convenience: Mutual funds are customer centric financial products. They aim at solving customer problems. Hence, depending on your risk appetite and time horizon, they offer a range of schemes you can invest in.
Further, each scheme offers you several options for investment, withdrawal and switching. You can choose to invest in lumpsum i.e. at one go or systematically invest every week/month/quarter. You can also withdraw from your portfolio systematically to meet your expenses or systematically switch from one scheme to the other.
Mutual fund investments are convenient. With the evolution of technology and the emergence of multiple fund houses, investment in mutual funds has become quick and hassle-free.
Transparency: Mutual funds make their portfolio holdings publicly available every month, so you know exactly where your money is being invested. Your investment advisor should make this information available to you in the form of a factsheet.