Mutual Fund is an entity which is formed under Indian Trust Act 1882. It mobilizes money from a number of investors, then invests it in various kinds of securities like equities ,bonds, money market instruments etc. to achieve a common objective of earning optimum returns on their investments with a commensurate risk . The returns on mutual funds come from distributions of income from dividends or interest and selling fund securities at a profit. Mutual Funds are well regulated in India. SEBI formulates policies, regulates and supervises Mutual Funds to protect the interest of the Investors.
The Mutual Fund is managed by professional fund managers who are experts in the field of investment. People think that Mutual Funds are elite investments made only for the wealthy class but fact is that one does not need large sum to invest in Mutual Funds, one can start with an amount as low as Rs 500. Mutual Funds are thus ideal vehicles for small investors for saving and investing. People are under an illusion that Mutual Funds are very risky that is not true. Because Funds are invested in well run and in diversified companies. The risk is only short term as returns are directly related to ups and downs of the market. But in the long run, as well run companies does better thus better returns are generated compared to other asset classes.
Here is a simple example to understand what is a Mutual Fund in simple words:
Let’s say you are having a house party and want to buy snacks. The total amount spend on the snacks will cost Rs 300. You and the other three friends pool Rs75 each and buy a variety of snacks like chips and drinks. you bought 4 bags of chips and 4 drinks and as per individual contribution and as per individual contribution, each person will receive a bag of chips and a drink. Just like your group pools money to buy snacks, investors pool their money into a mutual fund.
- The Fund House appoints a Fund Manager and other team members to manage the fund. A team of professionals manages the money and the investors can enjoy the fruits of this expertise without getting involved in the mundane tasks with a nominal fee. They make strategic investment decisions to meet the fund’s objectives.
- When an individual buys shares in a mutual fund, they gain part-ownership of all the underlying assets the fund owns. Mutual funds pool money from different investors. The fund’s performance depends on how its collective assets are doing. When these assets increase in value, so does the value of the fund’s units. Similarly, when the assets decrease in value, so does the value of the units. Each investor holds units and the Net Asset Value of the unit is determined daily at the end of the day by dividing the total value of the assets held by the Mutual Fund with total number of units.
- The Investors can earn returns through capital gains (the profit earned from the sale of a capital asset) and income distributions (such as dividends or interest from the fund’s holdings). These returns are either reinvested or paid out to investors, depending on the Mutual Fund policies.
BENEFITS OF MUTUAL FUNDS:
- Professional Management: Mutual Funds are managed by professional managers and investments are made after thorough research and after understanding the macro environment of the country. They have the required expertise and experience to monitor the investments . A fund manager continuously monitors investments and the environment and rebalances the portfolio as per the environment in order to get optimum returns.
- Easy Investment : Investing in Mutual Fund is quick and a straight forward process. You can start with one mutual fund and then gradually expand across different funds that match with your investment objective and risk factor.
- Small Capital Investment: One of the biggest advantages of Mutual Funds is that you can start investing in Mutual Funds with relatively small amounts that is as minimum as Rs 500.
- Well Regulated: All mutual funds are regulated by the Securities and Exchange Board of India (SEBI). This means that all mutual fund houses are required to follow the various mandates as laid down by SEBI. Thus, protects the interests of the investors. Also, SEBI makes it mandatory for all mutual funds to disclose their portfolios every month.
- Transparency: As per SEBI guidelines Mutual Funds have to, at regular intervals, declare their portfolios and NAV to ensure transparency in the conduct of Mutual Funds.
- Disciplined Investing: One of the advantages of Mutual Funds is Systematic Investment Plans or SIP’s( Systematic Investment Plan means recurring Investment on pre determined intervals) and on the other hand, if you have a significant amount of money to invest, you can even make a lumpsum investment in a mutual fund.
- Diversification: There is a saying “Never put all your eggs in one basket”. Achieving a balance between risk and return is crucial when making investment decisions. This balance is achieved by spreading your investments across different asset classes and sectors, reducing your exposure to any one particular asset or sector.
- Liquidity: One of the main advantages of Mutual Fund is that they are highly liquid investments . one can redeem investments in Mutual Fund anytime and receives payment in his Bank Account within three working days.
- Tax Benefits: Mutual Fund Investments that are held for a longer term are tax efficient. Mutual fund returns are subject to capital gains tax . If the assets are held for less than a year, the profit from this is subject to short term capital gain which is 20% of the profit and if the asset is held for a year and more then the profit is subject to long term capital gain which is 12.5% of the profit . Investment in ELSS(Equity Linked Saving Scheme) upto₹1,50,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961 but these funds have a lock in period of 3 years.
Mutual Fund investments are subject to market risks, read all the scheme related documents carefully.