What are mutual funds

What are mutual funds

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What are mutual funds?

A mutual fund is a financial instrument wherein several investors pool their money with a similar return expectation and risk profile. The accumulated corpus is invested in different asset classes such as money market instruments, bonds, stocks and other assets on behalf of the investors. The investment decisions are taken by professional money managers. Fund managers invest the pooled money either in a single instrument or a mix of different assets with an objective to generate capital gains for the investors. Each investor is allotted units in the proportion of his/her investment, which represents a portion of the holdings of the fund. Profits in the form of price appreciation or dividend and losses are proportionately distributed among investors. Mutual funds in India are regulated by the Securities and Exchange Board of India.

Why invest through mutual funds?

Everyone has a different financial goal to save and invest. You may invest to fund children’s education, while someone else may invest to have a substantial corpus after retirement. Asset allocation is done according to the financial goal. The number of available asset types bewilder and confuse most people. You may have to conduct thorough research to understand the nature and predict the behaviour of an asset. But you may not have the required skills or abilities to properly analyse an investment. This is where professional fund managers come in. You can easily outsource the management of your portfolio to a professional money manager. One way to outsource is to invest through mutual funds. There are different mutual funds based on the asset class, tenure and return expectations. Investors can choose a mutual fund according to their needs and the money is managed by professional managers who have a greater chance of meeting the stated objective. Mutual fund companies also manage all the paperwork and formalities associated with an investment.

Benefits of mutual funds

Investment in mutual funds comes with a plethora of benefits.

  • Lock-in period: Some financial instruments have a pre-decided duration known as the lock-in period, before which you cannot withdraw your investment. It varies across mutual funds. Open-ended mutual funds do not have a lock-in period, while tax-saving equity-linked savings scheme have a lock-in period of three years. With mutual funds, you have the flexibility to exit or sell your units.
  • SIP Option: There are mutual funds that accept small amounts at regular intervals which are known as a systematic investment plan. SIPs solve two problems. One, you don’t need to have a lump sum amount to invest in mutual funds. Second, it protects your investment from wild gyrations in the equity markets. If you invest a lump sum amount when equity markets are at a high, you are more likely to witness the erosion of the investment when markets decline. With SIP, you enter the market one step at a time and avoid being caught at the peak.
  • Flexibility to switch funds: A good investor makes changes to his/her portfolio according to market conditions. The mutual fund schemes on Bajaj Markets let you switch the funds depending on the performance.
  • Risk mitigation: Mutual funds invest in different assets so, even if an asset underperforms, the performance of other assets negates the loss. Even mutual funds that invest inequity, spread their exposure across sectors and companies.
  • Liquidity: Mutual funds are a liquid investment instrument. You are allowed to sell your units whenever you are in need of funds. You do not need to find a buyer or justify your decision. The fund house has to be informed and they will credit the amount into your account.
  • Tax-saving: Some mutual funds schemes also offer tax benefits. Investments into an equity-linked savings scheme qualify for tax deduction under Section 80C of the Income Tax Act. ELSS is often rated as one of the best tax-saving instruments as the returns are relatively higher than other instruments.
  • Convenience: Mutual funds provide unparalleled convenience as the investor has to hold just one security to enjoy the benefits of a diversified portfolio. Contrary to holding different assets, a mutual fund allows you to invest in a single instrument. Fund managers make important investment decisions on your part, collect interest income and ensure that dividends are received. It is also easier to invest and track your investments in a mutual fund.

How to invest in mutual funds?

There are two major ways to invest in mutual funds—direct and through an agent.

Agents are professionals who get in touch with potential customers and convince them about different mutual fund schemes. Investing through financial agents was very popular earlier but with the emergence of more efficient mediums, agents are losing relevance. However, agents can be helpful for people who need guidance to zero in on the suitable mutual fund scheme. They also help with the application process, transaction and redemption of mutual fund units. Agents charge a fee or a commission for their services.

Direct: Before the spread of the internet, direct investment meant going to the branch office of the fund house and collection an application form to fill. In the initial phase of the internet, the form could be downloaded from the web but had to be submitted manually. But it has become extremely easy to invest in mutual funds now. You can complete the entire process online ranging from filling the application to completing the transaction. It is also cheaper to invest directly as it eliminates intermediaries and the commission charged by them. At Bajaj Markets, the entire investment process can be completed in four simple steps.

  1. Choose the mutual fund scheme you want to invest in
  2. Provide the investment amount
  3. Complete the Know Your Customer process
  4. Complete the transaction

With the increasing acceptance of financial instruments in the country, mutual funds have become an ideal investment choice for a range of people with different goals. The mutual fund industry has also matured and the practice of mis-selling of schemes has largely been curbed. Fund houses send regular summaries of the performance which has made investing in mutual funds very transparent.   

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