Quite simply, a mutual fund is a mediator that brings together a group of people and invests their money in stocks, bonds and other securities. Let’s take the example of Equity Mutual Funds.
As a single investor, if you want to invest Rs 10,000 per month in the equities, there are very limited number stocks you can buy. Plus, you won’t be able to build a diversified portfolio of various company shares. Just like you, there are 100’s of other investors who would like to grow their money.
A Mutual Fund (AMC)company pools money from these investors for investment in a particular scheme with a specific objective.E.g. ICICI Prudential is an Asset Management company and ICICI Prudential Focused Bluechip Equity Fund is one of there Mutual Fund schemes in which individuals can invest.
This mutual fund invests in primarily large cap blue chip companies like HDFC Bank, Infosys, Reliance Industries, etc. You can see full list here.
A mutual fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Investing in a mutual fund offers you a gamut of benefits:
- Small investments: With mutual fund investments, your money can be spread in small bits across varied companies. This way you reap the benefits of a diversified portfolio with small investments.
- Professionally managed: The pool of money collected by a mutual fund is managed by professionals who possess considerable expertise, resources and experience. Through analysis of markets and economy, they help pick favorable investment opportunities.
- Spreading risk: A mutual fund usually spreads the money in companies across a wide spectrum of industries. This not only diversifies the risk, but also helps take advantage of the position it holds.
- Transparency and interactivity: Mutual funds clearly present their investment strategy to their investors and regularly provide them with information on the value of their investments. Also, a complete portfolio disclosure of the investments made by various schemes along with the proportion invested in each asset type is provided. You will not find this level of disclosure by insurance companies.
- Liquidity: Open ended funds can be bought and sold at their market value as they have their units listed at the stock exchange.
- Choice: A wide variety of schemes allow investors to pick up those which suit their risk / return profile.
- Regulations: All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor.
Mutual funds provide you a platform to start with small investment and that investment is managed by experts who guide as well as execute the transactions for you.