A Mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The ownership of the fund is thus joint or 'mutual'; the fund belongs to all investors. a single investor's ownership of the fund is the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund.
A mutual Fund is constituted as a Public Trust created under the Indian Trusts Act, 1882.
ADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS
There are several reasons that can be attributed to the growing popularity and suitability of mutual funds as an investment vehicle especially for retail investors:
Asset Allocation:
Mutual funds offer the investors a valuable tool Asset Allocation. This is explained by an example.
An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs. 100 crores and invested the money in various investment options, will have his Rs. 1 lakh spread over a number of investment options, i.e. Equity, Debt. (Govt/Securities, Company deposit) money market etc. Thus "Asset Allocation" is allocating your investments into different investment options depending on your risk profile and return expectations.
Diversification:
Diversification is spreading your investment amount over a large number of investments in order to reduce risk. For instance, if you have Rs. 10,000/- to invest in Information Technology (IT) stocks, this amount will only buy a handful of stocks of perhaps one or two companies. A fall in the market price of any of these company stocks will significantly erode your investment amount. Instead, it makes sense to invest in an IT sector fund scheme so that your Rs. 10,000 is spread across a larger number of stocks thereby reducing your risk.
Professionals at Work:
Few investors have the time or expertise to manage their personal investment every day, to efficiently reinvest interest or dividend income, or to investigate the thousands of securities available in financial markets. Fund Managers are professionals and experienced in tracking the finance markets, having access to extensive research and market information, which enables them to decide which securities to buy and sell for the fund. for an individual investor, this professionalism is built in when invested in mutual fund.
Reduction of Transaction Cost:
While investing in securities, all the costs of investing such as brokerage custodian services etc. borne by you are at the highest rates due to small transaction sizes. However, when going through a fund, you have the benefit of economies of scales; the fund pays lesser costs because of larger volumes, a benefit passed on to its investors like you.
Easy Acess to your Money:
This is one of the most important benefits of a mutual fund. Often you hold shares or bonds that you cannot directly, easily and quickly sell. In such situations, it could take several days or even longer before you are able to liquidate your holding. Investment in mutual fund, on the other hand is more liquid. An investor can liquidate his mutual fund investment by selling the units to the fund itself and receive his money within 3 working days.
Transparency:
The investor gets regular information on the value of his investment in addition to disclosure on the specific investments made by the fund, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.
Saving Taxes:
Tax saving schemes of mutual funds offer investors a tax rebate under section 80C of the income tax act. Under this section, an investor can invest upto Rs.1,00,000 per Financial year in a tax saving scheme.
Investing in the Stock Market Index:
Index schemes of mutual funds give the opportunity of investing in scrips that make up a particular index in the same proportion of weightage that these scrips have in the index. Thus, the return on your investment mirrors the movement of the index.
Investing in Government Securities: Gilt & money market schemes of mutual funds also give you the opportunity to invest in government securities and money markets (including the interbank call money market)
Well Regulated Industry:
All mutual funds are registered with SEBI and they function within the provision of strict designed to protect the investors. The operations of mutual funds are regularly monitored by SEBI.
Convenience & Flexibility: Mutual funds offer their investors a number of facilities such as inter-fund transfers, online checking of holding status, etc, which direct investments don't offer.
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Risk factors: Mutual Funds and Securities Investments are subject to market risks and there is no assurance or guarantee that the scheme's objects will be achieved. Please read the offer document carefuly before investing.
