Mutual Funds

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What is a Mutual Fund?

A mutual fund is a pool of money that combines the savings of a large number of investors and is managed by a professional Fund Manager. Instead of the investors worrying about what stock to pick, professional fund managers do the job for you. Mutual funds are run by mutual fund trust companies, also known as asset management companies (AMC’s). Each AMC operates a number of fund schemes that suit different types of investment needs.

In most of the funds, it is possible to start investing with as little as a few hundred rupees. The income / gains generated from these collective schemes is distributed proportionally amongst the investors after deducting applicable expenses. Also, unlike many other investments, mutual fund investments are highly liquid and can be withdrawn anytime. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.

Types of Mutual Funds

Equity Mutual Fund primarily invest largely in equity shares of companies and equity-related investments like convertible Debentures. They are a good opportunity for people looking to invest in good companies that have the potential for growth. Can focus on individual sectors or diversify across sectors. Certain schemes can also help save tax.

These funds aim to add stability to your equity portfolio and can provide stable returns . The funds invest in interest-bearing securities like Government & corporate Bonds, Money Market Instruments & term deposits. Some schemes provide easy Liquidity suitable to park surplus cash for the short term. Some schemes provide investment opportunities across different time periods. Some schemes try to benefit from changing interest rates.

Provide a blend of both equity and debt. The fund Invests in a range of securities like stocks and bonds depending on the scheme. There are also schemes that allow you to invest in Gold units along with either debt or Equity or both.

Invest in liquid and money market instruments such as treasury bills, interbank call money market, commercial papers, certificates of deposit, etc. Efficient for deployment of idle cash with a time frame of a few days to a couple of months.
Benefits of Mutual Funds

The most important benefit of investing in a Mutual Fund is that the investor can redeem the units at any point in time. Unlike Fixed Deposits, Mutual Funds have flexible withdrawals but factors like the pre-exit penalty and exit load should be taken into consideration.

Investing in units of a scheme gives investors exposure to a range of securities held in the investment portfolio of the scheme. Thus even a small investment of ₹500 in a mutual fund scheme can give investors ownership of a portion of a diversified investment portfolio. Diversification reduces the risk involved in building a portfolio thereby further reducing the risk for an investor. As Mutual Funds consist of many securities, investors’ interests are safeguarded if there is a downfall in other securities purchased.

Among other benefits of Mutual Funds, the most important benefit is its flexible nature. Investors need not put in a huge amount of money to invest in a Mutual Fund. Investment can be as per the cash flow position.

Investors may not have the time or the required knowledge and resources to conduct their research and purchase individual stocks or bonds. A mutual fund is managed by full-time, professional money managers who have the expertise, experience, and resources to buy, sell, and monitor investments actively. A fund manager continuously monitors investments and rebalances the portfolio accordingly to meet the scheme’s objectives. Portfolio management by professional fund managers is one of the most important advantages of a mutual fund.

Investment in ELSS up to ₹1,50,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961. Mutual Fund investments when held for a longer term are tax efficient.