A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities, ranging from shares, debentures to money market instruments or in a mixture of equity and debt, depending upon the objective of the scheme. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Why Invest in Mutual Funds?
Mutual Funds employ the services of skilled professionals who have years of experience to back them up. They use intensive research techniques to analyze each investment option for the potential of returns along with their risk levels to come up with the figures for performance that determine the suitability of any potential investment.
Diversification and Lowered Risks
Since a mutual fund is a trust that pools the savings of a number of investors sharing a common financial goal, the associated risks are greatly reduced. Investments are spread across a wide cross-section of industries, sectors and different types of instruments and so the risk is reduced. Hence, loss in one sphere will not greatly affect your overall investment status.
Even the investors, who could otherwise not enter stock markets with low investible funds, can benefit from a portfolio comprising of high-priced stocks because they are purchased from pooled funds.When compared to direct investments in the capital market, mutual funds cost less. This is due to savings in brokerage costs, Demat costs, depository costs, etc.
Investments in mutual funds are quite liquid and hence can be redeemed at the Net Assets Value (NAV)–related price on any working day.The investors can withdraw or redeem money at the NAV related prices in the open-end schemes. In closed-end schemes, the units can be transacted at the prevailing market price on a stock exchange. Mutual funds also provide the facility of direct repurchase at NAV related prices.
Being under a regulatory framework, mutual funds have to disclose their holdings, investment pattern and all the information that can be considered as material, before all investors. This means that the investment strategy, outlooks of the market and scheme related details are disclosed with reasonable frequency to ensure that transparency exists in the system. This is unlike any other investment option in India where the investor knows nothing as nothing is disclosed.
Investment in mutual funds also offers a lot of flexibility with features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans enabling systematic investment or you can withdraw or invest funds according to your needs and convenience.
Choice of Schemes
Mutual funds offer a variety of well-designed schemes and options that you can choose depending on your risk appetite. The number of categories is dizzying. Some examples: growth funds, which buy shares of burgeoning companies; sector funds, which buy shares of companies in a particular sector, such as technology or health care; and index funds, which buy shares of every stock in a particular index
In India, these funds become even more attractive because of the tax advantage, indexation benefits, long term capital gains tax, tax free dividends and much more.