What Are Mutual Funds?

Introduction to Mutual Funds

A mutual fund is a collective investment vehicle that collects & pools money from a number of investors and invests the same in equities, bonds, government securities, money market instruments. The money collected in a mutual fund scheme is invested by professional fund managers in stocks, bonds, etc., in line with a scheme’s investment objective. The income or gains generated from this collective investment scheme are distributed proportionately amongst the investors, after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. In return, mutual funds charge a small fee.

In short, a mutual fund is a collective pool of money contributed by several investors and managed by a professional Fund Manager. Mutual Funds in India are established in the form of a Trust under Indian Trust Act, 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996. The fees and expenses charged by the mutual funds to manage a scheme are regulated and are subject to the limits specified by SEBI.

How Do Mutual Funds Work?

When you invest in a mutual fund, you are pooling your money with many other investors. Mutual funds issue “Units” against the amount invested at the prevailing NAV. Returns from a mutual fund may include income distributions to investors out of dividends, interest, capital gains, or other income earned by the mutual fund. You can also have capital gains (or losses) if you sell the mutual fund units for more (or less) than the amount you invested.

Mutual funds are ideal for investors who:

• Lack the knowledge, skill, or experience to invest in stock markets directly.
• Want to grow their wealth but do not have the inclination or time to research the stock market.
• Wish to invest small amounts.

One should avoid the temptation to review the fund's performance every time the market fluctuates significantly. For actively-managed equity schemes, patience is key—give the fund a reasonable time (between 18 and 24 months) to generate returns.

Why Invest in Mutual Funds?

As investment goals vary from person to person—post-retirement expenses, children’s education, marriage, house purchase, etc.—the investment products required to achieve these goals vary as well. Mutual funds provide certain distinct advantages over investing in individual securities. Mutual funds offer multiple choices for investment across equity shares, corporate bonds, government securities, and money market instruments.

The key advantages of investing in mutual funds include:

• Diversification: Mutual funds allow you to invest in a variety of securities at a relatively low cost, reducing risk.
• Professional Management: Investment decisions are made by professional fund managers, saving you time and effort.
• Low Initial Investment: You can start investing with smaller amounts compared to individual stock investments.

In summary, mutual funds provide an excellent avenue for retail investors to participate and benefit from the uptrends in capital markets. They are a versatile, cost-effective way to achieve your financial goals.