What is a mutual fund?

A mutual fund is a financial institution that collects the money from the investors, those having a common financial goal, and invests the collected money in different asset classes, as defined by the investment goal. The main objective of the mutual fund is to manage pooled money from the investors, professionally by the fund managers. The Fund managers are the investment experts who take the decision to invest the pooled money on behalf of investors of the scheme.

What are the benefits of investing in a mutual fund?

These are the fundamentals benefits of investing in mutual funds:

• Simple concept and professional management - Mutual funds have a very simple concept and management, like all the investment decision taken by the experts. So, the investors just need to invest in it and the rest of the decision will be taken by fund managers.
• Well regulated - Mutual Funds are well regulated by the SEBI (Securities and Exchange Board of India). This provides comfort and instils confidence to the investors. This regulatory environment ensures transparency in the processes and transactions of the mutual funds.
• Provide diversification to our portfolio - Mutual funds provide an opportunity of diversification to the portfolio of the investors.
• Economies of scale - The collected or pooled money from investors with common financial goal ensures that mutual funds enjoy economies of scale.

What are the advantages and disadvantages of investing in mutual funds?

Advantages:

• They provide Diversification in the Investor's portfolio.
• They are flexible and convenient to handle.
• They have the number of choices to select the schemes.
• They have the safety of the regulated environment.

Disadvantage:

• Mutual funds have no tailor-made portfolios.
• There is no control over a cost in the hands of investors.
• In these funds, investors may face difficulties in selecting a suitable fund scheme.

 How does a mutual fund work?

• Mutual Funds are the collection of various financial instruments that generate returns over a period of time.
• In mutual funds, many investors who have a common financial goal pooled their assets or money and get mutual funds unit based on the Net Assets Value of that on the day of investment.
• Then, the collected or pooled money from investors is invested into the various financial instruments, such as shares, debentures and other securities by the fund manager to generate returns for the portfolio holders.
•   And the fund manager realizes a total gain or loss from these allocations and collects the dividend or interest income.
• After, any gain or losses in these investments are passed to the investors under the management of the fund, on which Net Asset Value of the fund depends

What are the different types of mutual funds in India?

The mutual funds are broadly classified into three categories:

• Equity Funds - An equity fund is a type of mutual fund investment that helps the investor to earn very high returns with the objective of long-term growth through capital gains. This is also known as stock fund.
• Debt funds - Debt funds are also known as fixed-income funds. This category invests in corporate bonds, government bonds, T-Bills etc as per the pre-decided objective. So, when the investors invest their money in this mutual fund then this mutual fund purchases bonds and whatever the interest earned from that bond, passes to its investors after deducting their charges.
• Balanced Funds - Balanced funds or hybrid funds are those categories of mutual funds that invest their corpus in a mix of debt and equity. These are suitable for those investors who want to take exposure in equity and debt at the same time.

How can I start investing in mutual funds?

• To begin investing in mutual funds, the first thing you need to do is to be "KYC compliant". KYC is a submission of your address proof, photographs, DOB (Date of Birth) proof and definitely your PAN card.
• Then you can directly approach brokers/distributers or broking site for investing in mutual funds such as Budwisefunds,fundsindia etc.
• Or you can directly approach the mutual fund through designated branches or websites.

Is it safe to invest in mutual funds?

Yes, mutual fund investments are safe, as these funds are professionally managed, highly diversified and have high liquidity and transparency. But the returns from mutual funds investment are quite sensitive to market fluctuations. So, it is advisable to investors to determine their risk appetite and financial objective before investing in the mutual funds.

Further Reading:

www.mutualfundssahihai.com

www.amfiindia.com