What Are Mutual Funds ? : The money pooled in by a large number of investors is what makes up a Mutual Fund . It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities.
Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed pro
portionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.
SEBI / AMFI has categorized Mutual Funds into different categories depending on their investment objectives, investment horizons, kinds of assets being invested into and finally the risk profiles of these asset classes. This categorization along with easy availability of historical performance data makes it easy for the average investor to under
stand where exactly her money is being invested , the risks associated with these investments and what could be the average expected returns although no assurance of any sort exists with regard to performance.
As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when:
1. You do not know how to do the job best – many of us hire someone to file our income tax returns, or almost all of us get an architect to do our house.
2. You do not have enough time or inclination. It’s like hiring drivers even though we know how to drive.
3. When you are likely to save money by outsourcing the job instead of doing it yourself. Like going on a journey driving your own vehicle is far costlier
To make the decision about whether to invest through Mutual Funds or directly, consider the following:
1. A small investment in an Equity Mutual Fund can allow you to own multiple stocks. This cannot be possible if you invest directly in these multiple stocks.
2. Highly qualified Fund Managers actively monitor Mutual Funds and make appropriate trades to optimize the returns. Most people who invest directly in stocks do not have the skill sets to manage these investments effectively.
3. Investing in Mutual Funds is very convenient and far less time-intensive for the average investor who is busy in her/his professional/business activity.
4. Mutual Funds have categorized Equity Mutual Funds into 10 categories and Debt Mutual Funds into 16 categories depending on the stocks/bonds being invested into along with the investment strategy. Thus the average investor will find it more easy to understand where her money is being invested.
5. A mutual fund portfoilio of various debt and equity schemes brings about a natural hedge to ensure solid long term returns without the risk of skewing your portfolio into a few stocks.