Mutual funds may seem complicated to people new to investing or investment products. They are a comparatively safer and low-risk investment option. If you have not invested in any form before and have as little as Rs. 5000 to spare, you can start a simple investment option known as “Mutual Funds”.
Mutual Funds are a good option for new investors because of the following advantages:
- Mutual funds are designed to make investing low-cost and straightforward. You can begin investing with as little as Rs. 5,000.
- Investors are not burdened with the decision and research involved in selecting the stocks and bonds to be purchased in the funds or the daily management and safekeeping of the chosen investments.
What are Mutual Funds
A mutual fund is a selection of stocks, bonds, money market instruments, or any similar assets bought by the investors’ money. A mutual fund can be different combinations of stocks, stocks & bonds, or any other variety of securities combined under the mutual fund as a single investment pool.
This combination is specified in the mandate of the mutual fund, and they cannot deviate from the set mandate.
Mutual fund investments are managed by Money or Fund Managers, who make the investment decisions and manage the funds to ensure that capital gains are maximized for investors.
Mutual funds are run by Asset Management Companies (AMCs), usually public limited companies. A Trust (and Trust Deed) is established by the Asset Management Company under which a mutual fund is launched. The Trustee acts as the custodian of the fund’s assets while the Fund Manager makes the investment and related operational decisions regarding the fund. Asset Management Companies can launch and manage multiple mutual funds with different or overlapping, or entirely distinct mandates.
Why Invest in Mutual Funds:
Mutual funds offer an optimized investment option to yield competitive returns to meet long-term or short-term financial goals. The investor can invest with the long-term financial goals of arranging funds for their child’s higher education or retirement savings or child’s marriage etc. An investor can also have short-term financial goals like saving for a vacation or buying a new car or a new home.
Before investing in mutual funds, all investors need to know their investment objectives. This will help determine the risk and return profile, investment timeline, and target goals. Understanding these questions will allow an investor to make more effective investment decisions.
By investing in mutual funds, the investor gets the advantage of exposure to different securities under a single investment package. They allow the investor to develop a diversified portfolio of assets while enjoying financial management by professionals.
Another key advantage of investing in mutual funds is that the investor can avail tax credit.
Types of Mutual Funds:
There are two primary forms of mutual funds. These are
- Closed-Ended Mutual Fund: These funds are traded on the Secondary Market after their launch through an Initial Public Offering.
- Open-Ended Mutual Funds: These funds are issued in the form of Units to investors, which can be redeemed (sold back) based on their Net Asset Value (NAV) at any time. These funds can be purchased and redeemed through the Fund Management Company, which daily announces their offer and redemption prices. These funds can also be listed on the Stock Market.