What is a Mutual Fund?
Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies.
In simple words Mutual Fund companies pool money from people and invest on their behalf and investors get various advantages because of this.
How do they work?
These companies collect money from you and invest on your behalf in various investment vehicles, say equity, fixed income, etc.
These funds can be of various types based on their patter which is predeclared. Say for example there can be a fund focused on investing just in Equities and that to in banking sector.
Why invest in Mutual Fund?
Mutual Funds are managed by large Asset management companies who hire professional fund managers who are experts and they tend to park your money safely. People with limited knowledge of equities can easy invest and participate in economic growth by investing in Mutual Funds.
Benefits of investing in Mutual Funds :
- Diversification: MF offers diversification as these fund managers invest in various diversified areas and companies. This offers benefits of higher growth rate of NAV over a period of time. Diversification is also a key in value investing!
- Professional management: There is a professional manager (the Fund Manager) who handles the fund.
- Risk management: Retail investors focus on risk management, because they might not even have the expertise so the professional manager diversifies and reduces the risk evenly.
- Liquidity: On can always sell a mutual fund which doesn’t have a lock in period. Now a days even Mutual Funds are traded on NSE.
- Well Regulated: Mutual funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI), which strives to protect the interests of investors.