A mutual fund is an investment vehicle that pools money belonging to many people to invest in a variety stocks, bonds or other securities. Mutual funds are managed by professionals who make the investment decisions for the fund with the goal of increasing the overall fund value. As the assets in the fund rise in value, your share of the fund (typically measured in “units”) will also increase in value. If the value of the fund’s assets decreases, so will the value of your units. Each fund has a written investment goal that helps you decide whether it should have a place in your overall financial plan.
A mutual fund typically focuses on specific types of investments. For example, a fund may invest mainly in government bonds, stocks from large companies or stocks from certain countries. Some funds may invest in a mix of stocks and bonds, or other mutual funds.
Benefits of investing in mutual funds:
When you invest in a mutual fund, your money is managed by finance professionals.
Investors who do not have the time or skill to manage their own portfolio can invest
in mutual funds. By investing in mutual funds, you can gain the services of professional
fund managers, which would otherwise be costly for an individual investor.
Mutual funds provide the benefit of diversification across different sectors and
companies. Mutual funds widen investments across various industries and asset classes.
Thus, by investing in a mutual fund, you can gain from the benefits of diversification
and asset allocation, without investing a large amount of money that would be required
to build an individual portfolio.
Mutual funds are usually very liquid investments. Unless they have a pre-specified
lock-in period, your money is available to you anytime you want subject to exit
load, if any. Normally funds take a couple of days for returning your money to you.
Since they are well integrated with the banking system, most funds can transfer
the money directly to your bank account.
Investors can benefit from the convenience and flexibility offered by mutual funds
to invest in a wide range of schemes. The option of systematic (at regular intervals)
investment and withdrawal is also offered to investors in most open-ended schemes.
Depending on one’s inclinations and convenience one can invest or withdraw funds.
Low transaction cost
Due to economies of scale, mutual funds pay lower transaction costs. The benefits
are passed on to mutual fund investors, which may not be enjoyed by an individual
who enters the market directly.
Funds provide investors with updated information pertaining to the markets and schemes
through factsheets, offer documents, annual reports etc.