Mutual funds offer the perfect solution for most individual investors as it pools money from thousands of investors and manages the amount through professional fund managers, who buy and sells securities like stocks and bonds. These trades in securities result in the fund making either a profit or a loss. This profit or loss is distributed back to the investors in proportion to their original investment in the mutual fund.
Mutual funds are popular because they offer many advantages -some of them are:
• Choice of schemes and diversification – There are a plethora of MF schemes on offer – you can chose funds that invest in equity or in debt or in commodities or in specific combinations of equity, debt and commodity. You can choose MF’s that only invest in large companies (low risk) or mid size companies (medium risk) or small companies (high risk). You also have MF’s that invest in industry themes like banking, IT, retail, FMCG etc. You can chose from MF’s that invest in long term (10 year) government bonds (very low risk), or in medium term corporate bonds or in money market securities or a combination of these.
• Professional and experienced management of funds – Experienced and skilled professionals manage Mutual Funds. Their job is to analyse the performance of various investment instruments – they are experienced in investment research and this is what they do for a living.
• Affordable investment– Most schemes come with a minimum investment of Rs 5,000 – so as an investor, you do not need a lot of money to start investing in Mutual funds.
• Easy to invest – Most funds can be invested through the route of Systematic investment plan (SIP) – it is something like the recurring deposit scheme that we have in banks. All you have to do is to set up an automatic money transfer system where a fixed amount of money goes to the particular MF scheme from your account at a fixed frequency (it can be monthly, quarterly or even daily) – so your investments will go automatically into the specified mutual funds.
• Liquid investment – Many Mutual funds are very liquid – which means that you can take your money back whenever you need it. So if you have some money in your account that is required after, let’s say 45 days, you can invest it in specific MF’s and on the 42nd day – ask for the money back and you will get the money plus your share of the profit/loss by the 45th day.
• Transparent investment – Most mutual funds declare the current value of their holdings, called the Net asset Value (NAV), every evening. The NAV tells you the value of your investment– so you know your profits or losses every day.
• Low cost investment – For their services, the MF companies do charge a small amount –the amount they can charge is governed by Securities and Exchange board of India (SEBI) and till recently they could charge a maximum of 2.5% per annum of the invested amount. And for this amount, the expertise that you get a fair amount of expertise as an investor.