What is a Mutual Fund? Why One Should Invest in Mutual Funds?￼3 min read
In this article, we will be discussing the basics of a mutual fund, what are its types and benefits and why one should invest in Mutual Funds. So, let’s get started!
What is Mutual Fund:
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. The combined holdings of the mutual fund are known as its portfolio. In simple terms, mutual fund houses collect money from the general public and invest in various securities.
Types of Mutual Funds:
On a broader level, the mutual fund is of 3 types.
1. Equity Fund – Invest the money pooled in from various investors from diverse backgrounds into shares/stocks of different companies.
2. Debt Fund – Invest primarily in fixed-income securities such as bonds, securities, and treasury bills.
3. Balance Fund – Balanced or hybrid mutual funds are a one-stop investment option offering exposure to both equity and debt segments.
Why MF Investing is better:
- Whenever we talk about the market, we got scared about the risk associated with it, FD is also risky but we trust our banks, as the same mutual fund houses, they have more than 25 years of experience in managing their funds.
- Compare the return, received in FD (Fixed Deposits) and inflation. Suppose the FD rate is 5.4% but the inflation rate is 7% then the real rate of return is -1.6%, the buying power of my money is reducing as inflation is more than our FD rate. To purchase something today we are paying the Rs. 100 but after some time, due to inflation we have to pay 107 and we are receiving from our FD is only Rs.105.4.
- Always make sure that if you are investing always get a return more than the inflation rate so that your buying power can be maintained.
- The large-cap has given a 12% return in 7 years, and 16-17% in 10 years. Balance funds have given a return of 11% in the last 5 years. The inflation is running at 7% then this return is good to maintain the buying power and in the longer term, it will also help to achieve our financial goals.
Benefits of Mutual funds:
- Diversification: In a large-cap fund there are 50-60 stocks, so the investment made by the public will be diversified into 50-60 stocks. The ups and down of any of the stocks will not see any affect on the portfolio a lot and as our economy is growing, the market will grow in the linear term, for this it is important to invest in a good mutual fund.
- Managed by experts: There is a fund manager who has a whole qualified team to monitor the market, tracking the news along with financial analysis.
- High liquidity– The amount Invested in the debt fund will be credited to our account within 2 days and in equity, it will take 3 days. Part redemption is also available in mutual funds, suppose you have invested 5 lakh and want to redeem only 2 lakhs.
- Tax Benefit: The interest return of FD is taxable but in the case of debt mutual fund maturing within 3 years is not taxable and after 3 years also the tax slab is low as compared to FD. And in the case of equity if the investment is more than Rs. 1 lakh and maturing within 1 year then the return amount over 1 lakh will be taxable at 10%.
- Ease of investing: Investment can be made online, with mutual fund investors and banks, etc. in mutual funds.
- Highly regulated and transparent: Mutual fund houses present the data every month in the public domain about the stock holding, duration, and amount of investment. It is highly regulated by SEBI (securities exchange board of India) and monitored by them very closely.
What should investors do?
An investor should invest in the funds with proper analysis before investing in any of the funds. There are a lot of mutual funds available, one can choose according to their financial goals and risk-taking appetite.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.