Mutual Funds are investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and other securities. Investors are issued units and can be redeemed as needed. The fund's Net Asset Value (NAV) is determined each day.
Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then having received it, make investments with the money Via an AMC. It is an ideal tool for people who want to invest but don't want to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fund manager proceeds to buy a number of stocks from various markets and industries. Depending on the amount you invest, you own part of the overall fund. The beauty of mutual funds is that anyone with an investible surplus of a few hundred rupees can invest and reap returns as high as those provided by the equity markets or have a steady and comparatively secure investment as offered by debt instruments.
What are the benefits of investing in a Mutual Fund?
There are several benefits from investing in a Mutual Fund.
- Small Investments
Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Such a spread would not have been possible without their assistance.
- Professional Fund Management
Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyze the markets and economy to pick good investment opportunities.
- Spreading Risk
An investor with a limited amount of fund might be able to to invest in only one or two stocks / bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified at the same time taking advantage of the position it holds. Also in cases of liquidity crisis where stocks are sold at a distress, mutual funds have the advantage of the redemption option at the NAVs.
- Transparency and Interactivity
Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. Mutual Funds clearly layout their investment strategy to the investor.
Open ended funds can sell their units as an when required, thus providing liquidity. Closed ended funds have their units listed at the stock exchange, thus they can be bought and sold at their market value. Over and above this the units can be directly redeemed to the Mutual Fund as and when they announce the repurchase.
The large amount of Mutual Funds offers the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk / return profile.
All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.
- Tax Benefit
Dividends are tax free for individuals, Coporates & NRI. (For more details on tax on Equity & Debt schemes refer Knowledge pool.)