Mutual Fund

What is a 'Mutual Fund'

A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional fund managers.

In India fund managers allocate the fund's investments and attempt to produce capital gains and/or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

The Securities Exchange Board of India regulates the Mutual Funds in India. The unit value of the Mutual Funds is known as net asset value per share (NAV). NAV reflects the composite prices of all the securities held along with the liquid cash. It is calculated on a unit basis after deducting all liabilities. If the prices of the majority of the securities held by the scheme goes up, the NAV will also rise and vice versa. The NAV moves in tandem with the prices of the securities held by the scheme. As per mandate, a scheme should calculate and publish its NAV on a daily basis.

Benefits of Investing in Mutual funds

Anything can be made into something more complex than it needs to be and mutual funds are no exception to this truth. However, mutual funds require no experience or knowledge of economics, financial statements, or financial markets to be a successful investor.

Mutual funds are best for you, here are a few key reasons to consider investing in mutual funds.

> 1. Diversification

One rule of investing, for both large and small investors, is asset diversification. Diversification involves the mixing of different types of investments within a portfolio and is used to manage risk. To achieve a truly diversified portfolio, you may have to buy stocks with different capitalizations from different industries and bonds with varying maturities from different issuers.

By purchasing mutual funds, you are provided with the immediate benefit of instant diversification and asset allocation without the large amounts of cash needed to create individual portfolios.

> 2. Liquidity

In Mutual funds the ability to get in and out with relative ease when compared with other forms of saving schemes like National Saving Scheme and Public Provident Fund. In general, you are able to sell your mutual funds in a short period of time. However, it is important to watch out for any fees associated with selling, including exit load fees.

You can withdraw or redeem money at the Net Asset Value in the open-end schemes. In closed-end schemes, lock in period is mentioned, investor cannot redeem his investment until that period.

> 3. Professional Management

Every Mutual fund scheme has a well-defined philosophy and objective of investment. When you buy a mutual fund, you are also choosing a dedicated and specialized professional fund manager and research team. This manager will use the money that you invest to buy and sell stocks that he or she has carefully researched. These experts diligently and judiciously study companies, their products and performance, and after thorough analysis, they decide on the best investment option most aptly suited to achieve the scheme's objective as well as investor's financial goals.

> 4. Smaller Avenues

Many investors don't have the exact sums of money to buy round lots of securities. Investors can purchase mutual funds with as little denominations as Rs5000.

Smaller denominations of mutual funds provide mutual fund investors the ability to make SIP investments with as low as Rs 500 taking advantage of compounding and averaging. So, rather than having to wait until you have enough money to buy higher-cost investments, you can get in right away with mutual funds.

> 5. Cost Efficiency

Costs as a percentage of assets in the portfolio are usually lower for an actively-managed mutual fund when compared to an actively-managed portfolio of individual securities.

> 6. Variety

Mutual Funds come in many different Categories and Types. Mutual funds can be based on your goals, needs, and your investment horizon.

It gives you the option to invest your money across various asset classes like equity with focus on diversification across sectors or particular sectors, different market cap stocks to particular market cap, debt with focus on long term, short term or instant money and ETFs. This allows you to diversify your investments and strive to reduce your portfolio risk.

The different types of Mutual Funds are as follows -

> Equity Funds

Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over a medium to long-term investment horizon. Equity Funds are high risk funds and their returns are linked to the stock markets. They are best suited for investors who are seeking long term growth. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.

> Tax Saving Funds

These funds offer tax benefits to investors under the Income Tax Act, 2961. Opportunities provided under this scheme are in the form of tax rebates under section 80 C of the Income Tax Act, 1961. They are best suited for long investors seeking tax rebate and looking for long term growth.

> Debt Fund / Fixed Income Funds

These Funds invest predominantly in rated debt / fixed income securities like corporate bonds, debentures, government securities, commercial papers and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seeking regular and steady income.

> Hybrid Funds

These funds invest both in equity shares and debt (fixed income) instruments and strive to provide both growth and regular income. They are ideal for medium- to long-term investors willing to take moderate risks.

> Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) track an index, a commodity or a basket of assets as closely as possible, but trade like shares on the stock exchanges. They are backed by physical holdings of the commodity, and invest in stocks of companies, precious metals or currencies. ETFs give you the flexibility to buy and sell units throughout the day, on the stock exchanges.