The stock market is a huge universe, and it is very easy for any beginner to get overwhelmed by it. What is mutual fund can be a question that can very easily pop-up in any fresh mind, as it is very common. MFs are not outside the purview of the stock market; in fact, they are an integral part of it. In this article, we will inform you about what is mutual fund, its benefits, and many other things that go along with it.
What is Mutual Fund?
A mutual fund is an investment instrument that pools investor funds to invest in assets such as stock and debt. It makes strategic investments in stocks, bonds, government securities, and other assets. It is comparable to a collective fund formed with the cooperation of multiple investors, in which each individual’s fund contribution is invested in stocks or shares of the investor’s choosing based on their financial goals.
MFs, in essence, allow you to invest in funds that you might not have been able to invest in otherwise due to the high fees of the investment. Furthermore, they are managed by competent and certified fund managers who conduct extensive research on the firms or funds in which to invest to ensure that the chosen fund will provide returns consistent with your financial objectives. This is especially beneficial for novice investors who are unfamiliar with the ins and outs of MFs and may be unable to make a financially prudent decision.
How does a mutual fund work?
Mutual funds provide a simple entry point into the financial market for regular investors. However, before deciding to invest, it is critical to understand how it works.
- The Asset Management Company (AMC):
A new fund is introduced to the market by an asset management company (AMC) or fund house. This is known as an NFO, or new fund offering. In the prospectus, the fund house mentions the fund’s investment objective. The fund will be invested in by interested investors with comparable investing goals.
- Portfolio Disclosure:
The fund manager invests in equity and/or debt assets based on the investment objective after the mutual fund combines money from different investors. Following the investment, the fund’s portfolio is disclosed.
SEBI oversees MFs. On a regular basis, fund houses must declare the fund’s NAV, expense ratio, assets under management (AUM), portfolio, and results. As a result, investing is more transparent.
- Lumpsum or SIP:
Investors can invest in a flat sum or through a Systematic Investment Plan (SIP). Investors can invest through their bank savings account by using the auto debit feature for the SIP plan. Calculators such as the SIP calculator and the lump sum return calculator can be used to determine the possible return on investments
- Effect of NAV:
Each investor will receive units of a fund based on the amount invested. The net asset value (NAV) of each unit is its value. Returns are also estimated based on the fund’s NAV movement. If the fund’s NAV rises, it will have a positive return; otherwise, it will have a negative return.
Till now we have covered what is mutual fund and how does a mutual fund work. So, now we will learn about regulation and benefits of mutual funds.
Regulation of mutual fund in India
In India, all money invested in mutual funds, raised by any organisation is controlled by SEBI (Securities and Exchange Board of India). SEBI not only oversees these companies, but also develops standards and policies governing the operation of these funds in order to protect investors’ money from acts of fraud or embezzlement. However, because the returns on mutual fund investments are based on market performance, SEBI cannot guarantee them. Depending on market performance, returns can be large or low.
Benefits of investing in mutual funds
There are numerous MFs available on the market. Each fund has a distinct investment goal. Furthermore, the minimum investment is as low as INR 500. This makes investing available to everyone. Also, one might invest in a fund whose investment objective matches their financial objectives.
One of the primary benefits of investing in MFs is that they provide diversification. In the case of equity, MFs invest in a variety of securities and firms. As a result, the portfolio is widely diversified and has lower volatility than a pure stock investment. MFs also diversify risk by investing in a variety of industries and asset classes.
MFs are extremely liquid investment vehicles. These investments can be entered and exited by investors at any time. These investments, unlike fixed deposits, feature a flexible withdrawal policy. However, in the case of ELSS funds, the exit load and lock in period must be considered.
- Professional Management:
Not all investors understand where and how to invest. MFs are managed by experienced fund managers. Therefore, their strategic decisions are supported by extensive study and analysis. Hence this contributes to investors receiving substantial returns.
- Small Investments:
MFs can be purchased for as little as INR 500. It encourages investors to begin tiny savings plans, known as Systematic Investment Plans (SIPs). As a result, MFs are appropriate for all types of investors. The investor can set the investment quantity and frequency for their SIPs based on their needs
- Safe and transparent:
MFs are governed by the Securities Exchange Board of India (SEBI). SEBI requirements must be followed by all fund houses. On a regular basis, all AMCs publish fund fact sheets. Hence, this makes the entire mutual fund investing process secure and transparent.
With this, we have come to the end of our article on what is mutual fund? Know its benefits. I hope now you understand what is mutual fund? It is the best way to start investing in the stock market as it is easy, safe, and well regulated. Share this informative article with your family and friends. Do comment with any doubts you might have.