Introduction
We suggest using mutual fund portfolio as the core underlying component of financial portfolios to achieve diverse financial goals of short and long term. As they are so fundamental to our plans it is important to understand and deconstruct what is indeed a Mutual Fund and why is it so attractive as an option for both newbie and for experienced investors. In this article we will explore in detail what are mutual funds and their characteristics which make them an indespensible tool for investors.
What are Mutual Funds ?
Mutual funds run as trusts by Asset Management companies (AMC) pool money from multiple investors into the Fund. The money this pooled is managed to different objectives like Capital Growth, Captial Protection etc. The money in the fund is invested in a diverse portfolio of securities (Stocks, Bonds etc.) according to investment mandate of the fund.
The portfolio is managed by a professional fund manager who makes investment decisions on behalf of the investors.
Mutual Funds Advantage
Mutual funds offer investors to invest in a diversified portfolio of securities. The portfolio diversification is hard to achieve as individual as it needs a lot of financial background knowledge and analytical capacity. The fund management team and fund manager provide the professional and analytical framework that is made available to investors. Investors also have the advantage of getting this diversification for low investment ticket size. Investors even if they invest low values in thousand of rupees still get the benefit of diversification and professional management.
And the professional fees are spread across the entire fund and has certain cap for each category of fund by SEBI the regulator. This means not only a professional management of investments is available, portfolio diversification is also achieved and all at a relatively low cost and for even the small amounts of investment.
By investing in a mutual funds, investors can gain exposure to a variety of securities that they may not be able to afford to purchase individually or need a large capital outlay. They also outsource the complexity of maintenance like monitoring individual stock performance and decisions of buy, sell and hold of the investments.
Horses for Courses
Mutal Funds also come in various forms of underlying securities. For example there are Equity funds, bond funds, money market funds, and balanced funds, each with its own investment objective and risk profile. Equity funds invest primarily in stocks, bond funds invest primarily in bonds, money market funds invest in short-term debt instruments, and balanced funds invest in a mix of stocks, bonds, and cash.
Additionally within each category there is a segment – Equity Mutual fund has Large Cap, Mid Cap and Small Cap and Debt Mutual Fund has Liquid, Short Term, Gilt, Corporate Bond to name a few. All of the options allow for planners, MFDs to provide for a tailored solution for customers and investors have a range of options to choose and tailor the investment horses (mutual funds) for courses (their financial goals)
Key Advantages
Mutual funds offer several key advantages for investors
- Portfolio Diversification
- Professional management
- Liquidity
- Low investment threshold
- Convenience,
- Transparency
- Strong Regulatory oversight.
Investors in mutual funds offer several key advantages for investors,Investors in mutual funds gain exposure to a diversified portfolio of securities, managed by professional fund managers, with the added benefit
of being able to invest in small amounts in a relatively low cost way, access to multiple investment options, tax benefits and a strong regulatory oversight.
Summary
Mutual funds thus are an extremely smart and attractive investment option for both newbies and veterans due to their diversification, professional management and the range of options provided for diverse financial goals. By investing in mutual funds, investors can achieve their financial goals while spreading their risk across different types of assets. Investors are also able to pick different levels of risk exposure and tailor the investment outcomes across time horizons. Thus a great level of flexibility and underlying structure and support is provide by the AMC, Fund Management team and Regulator for investors to choose Mutual Funds as their primary investment vehicle to reach financial goals.
