What is mutual fund and how is it different from Stock Market?

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. Shared by thousands of investors, mutual fund investments are collectively managed by a professional fund manager to earn the highest possible returns. Mutual funds are one of the best and safe investment instruments for wealth creation, tax savings, and achieving financial goals.

There are 3 major types of mutual funds all over the world:

1. Equity or Growth Funds: These schemes primarily invest in shares/stocks of companies. They are best for long term investment as they generate the highest returns based on the performance of the companies. Primary examples are Large Cap, mid-cap, sector, thematic and tax-saving funds.
2. Income or Bond or Fixed Income Funds: These schemes predominantly invest in Fixed income securities like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits, etc. These are suitable for income generation and are relatively safer investments. Primary examples include Liquid, Short term, Floating rate, and Corporate Debt funds.
3. Hybrid Funds: These invest both in Growth and Income funds, thus getting the best of both results. Examples include Pension Plans, Child Plans, Conservative Balance Funds, etc.

It is very important to decide which of these mutual fund investments helps you achieve your financial goals depending upon the time frame, budget, and risk assessment. Liquid funds are better for short term needs, income funds for medium and equity (or combination of many funds) for long term growth.

Though they might sound similar at an earlier stage, the major difference between stocks and mutual funds is that mutual funds are safer investments. Instead of picking stocks individually from the thousands of them listed on the stock exchange, you can rely on expert fund managers to make those investments for you. Then instead of keeping track of individual stocks of the fund, you can easily keep track of the fund as a whole. Wealth can be created when you buy company stocks that use your money to grow their business, creating value for you. Also, mutual fund investments are flexible with options for top-ups, systematic withdrawal/transfer, and growth/dividend. All Mutual Funds are registered with the Securities Exchange and Board of India (SEBI) and hence, your investment is safe. Thus, while deciding over the mutual fund vs stock problem, its easier to root for mutual investment as the safer option.

While most Indian Mutual Funds invest only in India, investing in overseas securities is also an option for the investor. SEBI approves any investment after scrutinizing the Scheme Information Document (SID), which clearly states out the scheme’s investment objectives, type of securities to be invested in, countries & regions, and risks unique to each security. Even after investing in overseas securities, Indian Mutual Funds have to comply with all SEBI regulations like providing daily Net asset value, liquidity and ensuring portfolio disclosure.

It is very important to decide which of these mutual fund investments helps you achieve your financial goals depending upon the time frame, budget, and risk assessment. Liquid funds are better for short term needs, income funds for medium and equity (or combination of many funds) for long term growth.

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