MUTUAL FUNDS
MF is a mechanism to pool the money from investors who wish to save and invest into securities through professional management in accordance to achieve financial goals. The money thus collected is invested in capital market instruments such as shares, debentures, and other securities.
The income earned through these investments is shared by its unit holders in proportion to the number of units owned by them. Thus, a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Basically there are three major types of MF's
1. Equity Funds
Funds that have a mandate to invest into stocks of public limited companies in accordance with its objectives. Generally, the investment objective here is to attain Long Term Capital Growth. Equity Funds can further be divided into Large Cap, Midcap, Multicap, Flexicap, Balanced etc.
2. Fixed Income Funds
Fixed Income Funds invest in Bonds or debt securities. Their purpose is to provide safety and returns on a regular basis. They are invested primarily into Government or corporate debt papers.
3. Money Market Funds
The money market funds consist of short-term debt instruments, mostly Treasury Bills. This is a safe place to park money. A typical return is almost same as the amount to earn in a regular savings account and a little less than the average Certificate of Deposits.
Why Mutual Fund?
Earning - Inflation = Real Return
To invest in a scheme where one gets 8% return on the investment. Now, if we consider 6% inflation, the real rate of return would be only 2% (8% - 6% inflation). Is it enough to achieve our various goals in life?
Invest in ups & downs (Value averaging)
Who does not wish to purchase stocks at a lower price and sell it at a higher price? No one knows whether any given time is the right time to buy or sell? A more successful strategy is 'Rupee Cost Averaging' wherein one invests a fixed amount regularly (preferably monthly). Thus, we purchase more when the prices are low, and purchase less when the prices are high.
Power of compounding
For Instance: We are investing Rs. 10,000 per month in Postal Scheme for 30 years. We will get Rs. 1.5 Cr at the rate of 8% whereas Mutual Fund Equity scheme can give us the return of Rs. 23 Cr (calculated at 15% CAGR).
Advantages of investing in Mutual Fund
Advantages of investing in Mutual Fund
- Professional investment management
- Diversification
- Low cost
- Convenience
- Flexibility
- Liquidity
- Transparency
- Variety
- Tax benefit