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Introduction:
Investment can be defined as the application of money or money’s value in a process that generates more money. In other words, multiplying an amount of money as a result of channeling the same through a process that adds incremental value to the original amount.
There are many ways in which wealth can be created and multiplied. There are myriad avenues for investing, each with a different objective, and with the same end result. One can invest in gold, or other precious metals like silver, platinum etc. One can invest in commodities like Wheat, Soya, Maize, etc. Invest in shares of companies. Or one can invest in Mutual Funds (MFs).
Definition of Mutual Fund (MF):
What is MF? Mutual Fund is a joint effort of wealth creation. Practically, a group of people come together and invest in a particular security/securities for the common good. This group of people is institutionally banded together in the form of a fund, or an agency that takes care of their investment issues.
It is only logical, that when a diverse group of people from different educational, cultural, economic and other backgrounds come together, there should be a common set of rules, customs and practices to harmonize their functioning. achieve their common goal.
The legal constitution of a Mutual Fund (MF) depends on the laws prevailing in the country of its establishment. For example, in the United States, mutual funds enjoy a special legal status. In India, they can be set up as asset management companies, with trustees running the day-to-day business. These trustees are competent people who have complete knowledge and understanding of the markets.
What do MFs do:
MFs are engaged in the business of collecting money from members and investing them in various shares, securities, bonds etc. for the benefit of their members. Different strategies are followed by mutual funds depending on their investment philosophy and the channels of investment officially available to them.
Fund Type:
There are basically two types of funds, growth funds and income funds. Apart from these, there is also a tax saving fund.
Income Fund:
A fund whose objective is to ensure regular income to its members during the tenure of the scheme. Accordingly, the MF selects the type of companies to invest in, resulting in a regular flow of returns which are distributed among the members as per the terms of the MF. This type of MF is beneficial for people who require regular income and are in a position to make the required investments.
Growth Fund:
As the name indicates, the emphasis here is on MF development. To achieve this objective, MF invests in companies that are likely to register rapid growth in a relatively short period of time. As a result, the risk factor associated with this fund is also high. Investors who are risk averse and are willing to wait for good appreciation of their investments without the need for regular income can choose to invest in these types of funds. ,
Tax Savings Fund:
Apart from the two types of funds discussed above, there is another type of fund offered by MFs with benefits in the form of tax savings rather than income and growth. The rationale behind such funds is that “a dollar saved is a dollar earned.”
Generally, these tax savings funds operate under the aegis of some government regime of tax concessions. That is, by investing in such funds, the investor gets some relief from his tax liability. Investors whose main concern is minimizing their tax liability will find this fund attractive.
Benefits of Mutual Funds:
Two heads are better than one! What happens in an MF is that several heads come together and use their brains for mutual benefit. Some of the benefits available to the members of MF are:
Benefits of Capital:
Let’s say there are 100 investors who want to invest USD: 1000.00 in a particular activity. If they invest individually, each will do so to the extent of his own, and each will profit to the limited extent of his investment. On the other hand, if these 100 investors came together and pooled their investments and invested as one entity, their investment of USD: 100,000.00 would yield to each of them, a USD: 100,000.00 return on investment, a USD : 1000.00 instead of one.
In the same way, an MF makes it possible for its members to invest in shares and securities that would be out of their reach as individual investors. Large-scale investments are made accessible to smaller investors by breaking large investments into smaller lots or tranches.
Benefits of Specialization:
A common investor may have an idea of where to invest and what to do with his money. However, in order to maximize one’s returns and fully enjoy the benefits of investing, one must have professional knowledge of various investment instruments, as well as a thorough understanding of the market and how it functions.
This is where the expertise available with MFs comes into play. Mutual funds are managed by professionals who know their job. By investing in MF the investor is taking advantage of the expertise of the fund manager and reaping the benefits of his investment.
Benefits of Diversification:
An investor, in his individual capacity, may not be in a position to invest in a diversified set of sectors due to his limited resources. However, by investing in an MF, he gets the benefit of investing in a cross section of activities and industries. By doing so, the investor, on the one hand, benefits from a boom in any sector in the MF portfolio, and on the other hand, is not adversely affected to a large extent, due to the spread of his wealth across different avenues. of regions.
other benefits:
Some other benefits of participating in mutual funds include the tax breaks available in some funds. Further, an MF offers liquidity wherein, subject to certain restrictions, an MF member can redeem a part of his investment as and when required. Furthermore, the investor is not required to liquidate his entire holding, but sell only marketable lots as specified, and retain the remainder of his portfolio. Thus the investor enjoys the benefits of having a diversified portfolio without having to invest in each sector separately.
conclusion:
Mutual funds, as an investment vehicle, have proven themselves to be versatile, serving both small and large investors alike. They do not require the investor to be investment-savvy in order to take advantage of them. In fact, they are meant for people who either do not have an in-depth knowledge of the markets, or who cannot put in the time and effort required to do extensive research before investing.
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