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.
How mutual funds works?
A mutual fund is set up by the Sponsor or Promoter. An Asset
Management Company (AMC) is appointed
to oversee and manage the fund’s portfolios.
An investor puts in money in a mutual fund scheme in
exchange for units. Some fund units can be
bought only during a new fund offering, while some can be bought any time.
The AMC generally charges a small fee for managing the
assets
This money collected from a pool of investors is then used
to purchase stocks, bonds, money-market
instruments, government securities, ETFs, gold and so on. The scheme’s prospectus will give a
detailed idea about the kind of assets that will be purchased.
The portfolio is managed by the AMC. They regularly buy and
sell the assets. Any profits made would
be distributed amongst the investors as dividends.
What are the benefits?
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:
Diversification: Mutual funds achieve diversification by pooling money from various investors to invest in a broad range of securities such as stocks, bonds, and other assets. This spreads risk, reducing the impact of poor-performing investments and enhancing the overall stability and potential returns of the portfolio.
Professional management: In mutual funds, professional management entails skilled fund managers making strategic investment decisions. They leverage market expertise to select and manage a diversified portfolio, adapting to changing conditions. This proactive approach aims to optimize returns and align with investors' financial objectives, enhancing overall fund performance.
Timing: Professional fund managers leverage market expertise to optimize buying and selling, enhancing potential returns for investors. Utilizing market analysis and insights, they aim to capitalize on favourable market conditions, optimizing returns for investors and aligning with the fund's investment objectives.
Transaction cost: Mutual funds benefit from economies of scale, as the collective pool of investors allows for lower per-investor transaction costs, enhancing overall cost efficiency for individual investors.
