What are Mutual Funds | Benefits of investing in Mutual Funds

What are Mutual Funds | Benefits of investing in Mutual Funds

A mutual fund is an investment vehicle for investing in stocks and bonds. Mutual funds pool money from a large number of investors and invest this money in securities such as stocks, bonds, money markets instruments and similar securities. 

These funds are managed by professional fund managers, who invest the fund's money in various securities and attempt to produce capital gains for the fund's investors. 

Every investor has a share in the gains or loss of the fund. Investing in mutual funds is much easier than buying or selling individual stocks and bonds on your own. Investors can redeem their units when they want.

Who regulates Mutual Funds?

All mutual funds are registered with SEBI (Securities and Exchange Board of India). SEBI formulates policies and regulates the mutual funds to protect the interests of the investors. It notified regulations in 1993, revised in 1996 and issues guidelines from time to time.

Also read: Direct mutual funds platforms in India to invest online? 

Who Manages Mutual Funds?

Mutual funds are managed by an AMC (Asset Management Company). An AMC is a company that invests its clients' pooled money into securities such as stocks, bonds, money markets instruments and similar securities that match the declared financial objectives. 

An AMC may have various types of mutual fund schemes. The AMC hires a professional fund manager, who buys and sells securities for achieving the objectives of the mutual fund scheme.

Benefits of investing in Mutual Funds

Following are the benefits of investing in mutual funds:

Professional Money Management

Professional fund managers manage the money collected by a mutual fund. Fund managers monitor the market and economic trends and analyze securities in order to pick good investments for achieving the objectives of the mutual fund scheme.

Small investments

The minimum initial investment for a mutual fund is very low for most funds. You can start investing with as low as Rs. 500 and get the advantage of long-term equity investment. This is the biggest benefit of mutual fund that at a very low cost the investor gets his investment managed by experts.

Diversification

An example of diversification is provided by the proverb "Don't put all your eggs in one basket". A mutual fund invests in various sound stocks or bonds, which help in spreading the risk factor. If a particular sector does not perform well then the loss can be compensated with profits made in other sectors.

Transparency

Mutual funds provide regular updates to the investors such as daily NAVs, as well as information about the current value of the investment and fund manager's strategy to give a picture of how your investments are doing. The performance of a mutual fund is reviewed by various rating agencies, making it easy for investors to compare between different mutual funds.

Safety

All the mutual funds are regulated by SEBI (Securities and Exchange Board of India). It assures that your investments are managed in a disciplined and regulated manner and are in safe hands.

Liquidity

You can sell your mutual fund units on any business day. Unless they have a pre-specified lock-in period, your money will be available to you anytime. An open-ended fund can be sold at NAV based prices and a close-ended fund can be traded on the stock exchange.

Choice and Variety

The investors can choose funds from a wide range of mutual fund categories and types available to them. This enables the investor to choose what suits him/her best according to his/her risk-bearing capacity and return expectation.

Beat Inflation

Mutual funds are as an ideal investment option to help the investor to put their savings for long-term inflation adjusted returns. Investing in mutual fund over a long period is one of the best ways to stay ahead of inflation.

Also read: Mutual fund Apps for investing in mutual funds 

Disadvantages of Mutual Funds

Risks and Costs

The value of a mutual fund fluctuates according to the changing condition of the market. Most of the mutual funds charge operating fees and expenses associated with investing in mutual funds from investors. Some mutual funds also charge high sales commissions and redemption fees.

No Guaranteed Returns

Returns on mutual funds are not guaranteed as mutual funds invest in debt as well equities. Returns on a mutual fund depend on the market conditions.

No Control on Investment

The investor does not have any control over investment because the fund manager decides what to invest and when to invest. It means you trust someone else for your money when investing in a mutual fund.

No Insurance

Mutual funds do not have insurance coverage. Although, all the mutual funds are regulated by SEBI (Securities and Exchange Board of India) bur are not insured against losses.

Types of Mutual Funds

SEBI has broadly classified mutual fund schemes in the following groups:

1. Equity schemes

Equity schemes further classified into 10 categories.

2. Debt schemes

Debt schemes further classified into 16 categories.

3. Hybrid schemes

Hybrid schemes further classified into 6 categories.

4. Solution oriented schemes

Solution-oriented schemes are classified into 2 categories.

5. Other schemes

Other schemes are classified into 2 categories.

Large Cap

1st - 100th company in terms of full market capitalization.

Mid Cap

101st - 250th company in terms of full market capitalization

Small Cap

251st company onwards in terms of full market capitalization.

What is NAV?

NAV (Net Asset Value) is the value of a fund's assets minus the value of its liabilities per unit. It is calculated by the AMC at the end of every business day. NAV = (Value of assets-Value of liabilities)/number of units in the fund.

Also read: How to invest in mutual funds online?

Also read: How to start a SIP?

Also read: Benefits of SIP | Advantages of SIP

Also read: ELSS (Equity Linked saving Schemes) | Tax saving mutual funds

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What are Mutual Funds | Benefits of investing in Mutual Funds