What are Mutual Funds?
A mutual fund is a type of professionally managed collective investment scheme that pools money from many investors to purchase securities. While there is no legal definition of the term “mutual fund”, it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. — Wikipedia
Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund. This money is then managed by a professional Fund Manager, who uses his investment management skills to invest it in various financial instruments. — Association of Mutual Funds in India (AMFI)
Why should I invest in a Mutual Fund?
Beats Inflation: Mutual funds have time and again shown that is the best bet to beat inflation. Since mutual funds invest in instruments that generate larger income they are often the best investment for an average investor to beat inflation.
High Returns: Mutual fund managers look for opportunities across sectors and invest in places that can generate higher returns.
Investments done by Experts: You may ask if mutual funds invest in some instruments and charge for it why can’t you invest yourself. Each mutual fund will have a dedicated fund manager and his team to research the market and then invest. So if you do not have time or the required skill to operate in financial market you should trust the expert i.e. the fund manager.
Income Tax Friendly: Unlike many financial products, mutual funds are income tax friendly. You pay zero income tax or very little income tax depending on the choice of fund and duration it is held.
No Lock in: Many financial products require a lock in. For example insurance endowment plan will lock your investments for certain years, PPF will lock in for 15 years etc.. Mutual funds are flexible even SIP in mutual fund is not a legal contract to continue you can withdraw money anytime from the fund and invest anytime. There are some exceptions and this is the reason me putting a * there. Close ended funds lock your money for the duration of the scheme.
Cost Friendly & Transparent: Each financial products has its expenses. For example a simple savings account in your bank has expenses like bank’s office its employees etc. Mutual funds charge you money for doing investments on your behalf however these charges are relatively lower than most of the other financial products and also very transparent. This means you know the exact expense ratio of the mutual fund before you invest. AMFI has also laid down guidelines for distributors to disclose their commissions before concluding the sale so its transparency all around unlike many other products. Fund managers also provide you regular updates on their investments this makes this product more transparent.
Helps Diversify: Mutual Fund helps you diversify as it invests in multiple stocks or instruments. If you have a portfolio of different mutual funds you have a diversified portfolio of assets that themselves are diversified.
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