Mutual funds are investment vehicles that pool money from investors. The money is then invested across a wide variety of assets like stocks, bonds, gold, etc. depending on the investment objective to earn returns.
By the end of 1988, UTI had total assets worth Rs 6,700 crore. Soon after, eight funds were established by banks, LIC and GIC between 1987 and 1993. The total number of schemes went up to 167 and total money invested – measured by Assets under Management (AUM) – shot up to over Rs 61,000 crore. In 1993, private and foreign players entered the industry, marking the third phase. The first entrant was Kothari Pioneer Mutual fund, which launched in association with a foreign fund. The Securities and Exchange Board of India (SEBI) formulated the Mutual Fund Regulation in 1996, which, for the first time, established a comprehensive regulatory framework for the mutual fund industry. Since then, several mutual funds have been set up by the private and joint sectors.
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Over the years, mutual funds have emerged as a highly popular investment option among investors in India and across the globe. Here’s why mutual funds are beneficial:
Mutual funds give you access to a diversified portfolio. If you had to invest directly, you would have had to shell out a lot of money for diversification. In contrast, using a minor amount, you can have access to a portfolio with investments across mutliple stocks or bonds.
As an investor, you conduct your own research before buying a stock or bond. However, there are so many options out there that it can become confusing. A mutual fund, however, allows you to save time and resources in this research. Experts in the asset management company will be investing on your behalf through a mutual fund.
In the stock market, timing is one of the most important factors. A mutual fund allows you to sit back and relax, and not worry about buying or selling at the right time.
When you buy a stock or bond, you have to pay a small amount as fees every time. Imagine, if you were to buy a hundred assets to diversify your portfolio, you had to pay a charge for each of them. This is not so for a mutual fund. All you have to do is pay a small fee once.
PROFESSIONAL INVESTMENT MANAGEMENT: When you invest in a mutual fund, your money is managed by professional experts. This is one of the primary benefits of investing in mutual funds. Being full-time, high-level investment professionals, a good investment manager is more resourceful and capable of monitoring the companies the mutual fund has invested in, rather than individual investors.
LOW INVESTMENT THRESHOLD A mutual fund enables you to participate in a diversified portfolio for as little as Rs 5000, and sometimes even lesser. And with a no-load fund, you pay little or no sales charges to own them.
PROFESSIONAL INVESTMENT MANAGEMENT: When you invest in a mutual fund, your money is managed by professional experts. This is one of the primary benefits of investing in mutual funds.
LIQUIDITY: In open-ended schemes, you can get your money back at any point in time at the prevailing NAV (Net Asset Value) from the Mutual Fund itself. This makes mutual fund investments highly liquid. Compare that with a fixed deposit or a bond which may have a fixed investment duration. VARIETY: While investing in mutual funds, you are spoilt for choice. You have a number of mutual fund schemes to choose from, which may invest in a whole range of industries and sectors, different kinds of assets, and so on. You can find a mutual fund that matches just about any investment strategy you select.
TRANSPARENCY: SEBI regulations for mutual funds have made the industry very transparent. You can track the investments that have been made on your behalf to know the sectors and stocks being invested in. In addition to this, you get regular information on the value of your investment. Mutual funds are mandated to publish the details of their portfolio regularly.
KNOW YOUR FUND MANAGER: The success of a fund, to a great extent, depends on the fund manager. Some of the most successful funds are run by the same managers. It would be sensible to always ask about the fund manager before investing as well as knowing about changes in the fund manager's strategy or any other significant developments that an AMC may have undergone. For instance, if the portfolio manager, who generated the fund's successful performance, is no longer managing that particular fund, you may do well to wait and analyze the pros and cons of investing in that fund. READ THE FINE PRINT: The prospectus says a lot about the fund. Reading the fund's prospectus is a must to learn about its investment strategy and the risk that it is prone to. Funds with higher rates of return may carry a higher element of risk. Hence, it is of utmost importance that an investor always chooses a particular scheme after considering his financial goals and weighs them against the mutual fund’s risk. That said, remember that all funds carry some level of risk. Just because a fund invests in government or corporate bonds does not mean that it does not have any risk. COSTS: A fund with high costs must perform better than a low-cost fund to generate returns for you. Even small differences in fees can translate into large differences in returns over a period of time. So, ensure the costs and returns tally. There is no point in spending extra if it is delivering the same kind of returns like a low-cost fund.