What are Mutual Funds & Why invest in It?

Even though awareness about mutual funds has increased significantly of late, several people are unsure of what mutual fund means, or how it works. They find it intimidating and complicated.

Worry not, here in this post, you can find all about mutual funds – what are they, how they work and benefits, explained clearly, minus jargons.

Let’s start with the basics,

Understand Mutual Funds and How Does it Work?

Simply put, mutual funds pool money from several investors and invest them in equities, debts, commodities, or a combination of these, on behalf of the investors.

When you invest in a mutual fund, you are essentially hiring a fund manager to do the investing for you. The fund manager tracks and monitors your investments, making sound decisions on your behalf. For this service, you pay a small fee to the fund manager and the fund house.

As a mutual fund investor, you own units that represent a portion of the fund’s holdings. The income generated from this collective investment (owned by all investors in the fund) is distributed proportionately after deducting expenses, based on the NAV (Net Asset Value).

Why Invest in Mutual Funds aka the Benefits

1. Diversification: You would have come across financial experts stressing on the importance of a diversified portfolio. With mutual funds, you enjoy built-in diversification. Your money along with money from other investors is pooled to buy holdings in a wide variety of stocks, bonds and/or other securities.

The general rule of investing is that not all investments perform well at the same time. Having a diversified portfolio helps you balance out the losses with gains, thereby enjoying maximum returns.

2. Professional Management: Most of us hire professional taxmen (auditors) to help with our taxes. The reasons for this are – we either don’t have the time to manage our taxes by ourselves, or we don’t have the skills to figure it out. The same is true for mutual funds.

The professional team behind your mutual fund takes all the decisions on your behalf, thereby freeing you from the hassles of investing.

1. Different Funds to Suit all Financial Objectives and Risk Appetites: This is one of the biggest benefits of mutual funds. There are plenty of funds to choose from. You can select funds based on your financial objectives, risk factors, investment horizon and more.
2. Easy to Buy and Sell: You can easily get started with mutual funds by investing an amount as low as just 500 Rupees per month. Also, starting a mutual fund is quite easy, and several firms let you begin one online. Another big advantage of mutual funds is that you can sell your fund units (partly or in full) at any time if you need emergency access to your funds.
3. Above all, Inculcates the Habit of Disciplined Investing: This is the biggest benefit of mutual funds. When you set up a SIP (Systematic Investment Plan), you continue investing a fixed amount in your mutual fund scheme, without fail, month after month. This way, you don’t skip investments and continue to stay invested for a long time.

As expert investors say, it’s not about making smart decisions, but consistency is the key to investing success. With mutual funds, you stay invested continuously, irrespective of the market performance or your personal financial commitments, thereby building a handsome sum over the years.

Now, that you understand what are mutual funds and its benefits, are you ready to get started? Select the right asset management company that you can trust and start selecting a fund based on your goals and risk appetite. Make sure you read the offer documents carefully always before you invest.

Hi I am Atish Nayar. I am working as freelancing agent.