Mutual Fund Unlocked: Basics of Mutual Funds

Mutual Fund Unlocked - Part I: Basics of Mutual Funds

Mutual fund (MF) is a collective investment vehicle wherein investors lacking expertise in the securities market can invest their money to earn better returns. In the developed financial markets, MFs have almost overtaken bank deposits and the total assets of insurance funds.

Mutual funds are professionally-managed trusts which pool the resources of many investors and investing them in the securities like bonds, commodities, stocks and money market instruments which are short-term in nature.

The investment is diversified into various cross-sectional industries, sectors and instruments which reduce the risks. These funds are managed by the professional fund managers employed by the fund houses.

MF houses issue units to the investors in accordance with the money invested by them. So, the investors of mutual funds are known as unitholders. Profits and losses arising from the investment are shared among investor in the proportion to their investment. The fund houses offer many schemes with different investment objectives.

Advantages of Mutual Funds 

Diversification- Diversification is the key advantage of investing money into the mutual funds. Mutual funds invest in a number of companies spread across various sectors and industries. This minimizes the risk from market volatility.

Professional Management- With a small sum of investment, investor can avail specialised service from professionals. So the investors who lack time or skill to manage their investments can invest in mutual funds where they can get the services and backing of a professional research team.

Return Potential- Mutual funds assure higher return potentials in the medium or long-term by investing in a diversified basket of selected stocks.

Low Cost- With the benefits of scale in brokerage, transaction costs, custodial and other fees mutual funds are less expensive investment option for the investors.

Flexibility- Investors of mutual funds enjoy the benefits of convenience and flexibility offered by fund houses providing a wide range of schemes. SIP ( Systematic Investment Plan) and SWP ( Systematic Withdrawal Plan) makes it more flexible for investors to allocate monthly investment in smaller amounts and withdrawals when required.

Transparency- Investors receive regular information on the value of the investment made by them in addition to this they also receive information about the specific schemes in terms of asset allocation and outlook, etc.