Why invest in Mutual Funds?

Apr 11, 2011     Posted under: Investment

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A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal i.e., it is a collective investments scheme which is professionally managed. The money thus collected is then invested in capital market instruments to buy stocks, bonds, shares, debentures, short-term money market instruments, and/or other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

The mutual funds will have a fund manager who is responsible for investing the collective money into specific securities. When you buy mutual fund, you are actually buying units or portions of the mutual fund and thus you become a shareholder or unit holder of the fund.

Mutual funds make use of diversification – which is nothing but spreading out the money across available of different types of investments. By opting to diversify respective investment holding reduces risk to a greater extent. As, even if one investment is not giving returns as expected, it allows in the end to average out the returns from all the investments. The basic level of diversification is to buy multiple stocks rather than just investing in a single stock. Mutual funds are set up to buy many stocks.

Types of Mutual Funds Scheme

By Structure

  • Open – Ended Scheme
  • Close – Ended Scheme
  • Interval Schemes

By Investment Objective

  • Growth Schemes
  • Income Schemes
  • Balanced Schemes
  • Money Market Schemes

Other Schemes

  • Tax Saving Schemes
  • Special Schemes
    • Index Schemes
    • Sector Specific Schemes

Mutual funds have advantages compared to direct investing in individual securities:

  • Professional Management
  • Diversification
  • Convenient Administration
  • Return Potential
  • Low Costs
  • Liquidity
  • Transparency
  • Flexibility
  • Choice of schemes
  • Tax benefits
  • Well regulated

Mutual Funds have few disadvantages as well:

  • Fees
  • Less control over timing of recognition of gains and losses
  • Less predictable income
  • No opportunity to customize

NitiN Kumar Jain

Nitin works in an IT MNC professionally but blogs and owns NKJ Live. He is also the co-owner of a professional start-up ARGHAM BYTES

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