What is a Mutual Fund?

Everyday we’re bombarded with banner ads and big billboards everywhere asking us to invest in SIPs or Tax saving mutual funds.

Most of us know what Mutual funds are. But, really, do we?

Mutual Fund Ad

Mutual Fund Ad


Does anyone need any skill to invest in an FD or Post office savings scheme?

You just go to the bank or post office with your money and open it. You know the returns you’ll get. You’re done.

Investing in equities is not as simple as that. You can buy/ sell stocks in one click but whether it’s going to increase your money or risk your money, is left upto many factors, some beyond your control. But, you know that investing in equities is very profitable. You want to get your hands dirty.

People in this stage, usually opt for stock trading based on tips. For us, that’s a strict NO. You may even gain money, but we advise you against this. Why?

In our 5 years at TradersCockpit, if there’s one thing we have consistently encountered, that is human emotion. Raw human emotion is never more at display than when one encounters a loss of any kind. 2-3 months you may make money on stock tips, but you eventually run out of beginner’s luck and your morale takes a beating. We have seen this with EVERY single stock trader who trades on tips alone and nothing hurts us more than to see this.

Want to participate in equities but don’t have the time and knowledge? Start with Mutual funds. Make some money and gain knowledge and then venture on your own.

Why Mutual funds?

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities as per a planned, defined objective/ strategy. The income earned through these investments after subtracting management fees and expenses, and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.

So 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.

Professional management: Mutual Funds appoint experienced, professional Fund Managers who devote themselves exclusively to tracking the markets, analyzing securities and implementing a consistent investment strategy. The Fund Managers are backed by dedicated Research teams, who actively analyze the overall market conditions as well as individual securities and assist the Fund Manager in selecting the best opportunities for investment.

Ofcourse not all fund managers are created equal. That’s why every year you have the top 3 published in major publications. The extra returns that a fund manager generates is due to superior stock selection, betting on the right sectors, anticipating economic changes, adequate risk management, etc. The top fund managers have strengths which the fund unit holders put together can’t beat. So, if you go with any top rated fund, you can be sure that you will get better returns for your money.

Top Fund Managers

Top Fund Managers

Portfolio Diversification: Mutual funds are a convenient and affordable way of investing in a wide range of investments which would be very difficult and time-consuming to purchase and manage individually. Mutual funds typically invest in a broad cross-section of industries and sectors, and thereby offer a degree of diversification that would be difficult to achieve on your own. The diversification cuts risk as well as takes advantage of some positions.

Good Returns: A well-selected portfolio of Mutual Funds has the potential to deliver satisfactory returns over the medium to long term, with low volatility.

Good Features : Through features such as Systematic Investment Plans (SIP), Systematic Transfer Plans (STP), Systematic Withdrawal Plans (SWP) and dividend reinvestment plans you can systematically invest or withdraw funds according to your needs and convenience. Mutual fund SIPs in particular has become very popular among middle class Indians.

Small investments: You can start with as little as Rs 500, need we say more? How easy is that!

Choice: You can choose a scheme based on your risk appetite and expected returns. Whether you are risk averse or aggressive you’re covered. You can use a tool from Moneycontrol to do that too!

Top Mutual Funds India 2016

Top Mutual Funds India 2016

There are close to 11408 schemes as per AMFI! If you thought choosing from 31 flavours of ice cream was a draining game, welcome to this!

Luckily, SEBI has intervened again and has refused to clear new funds unless they are distinctly different from existing ones. It has also asked fund houses to merge similar schemes. These moves protect investor interest and help reduce the clutter in the industry so that we can make better choices without breaking our heads.

Liquidity: Closed ended funds can be bought and sold at their market value as they have their units listed at the stock exchange. In addition to this, units can be directly redeemed to the mutual fund as and when they announce the repurchase. So, you can get cash, whenever you have a need, even before your end goal date.

Economies of scale: The portfolio of an individual is relatively small as compared to a mutual fund portfolio. This leads to costs eating into returns for individuals. However on a large portfolio, mutual funds end up reducing costs for each unit holder.

Transparency: Regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager’s investment strategy and outlook, is provided by each Mutual Fund.

Well-Regulated: All Mutual Funds are registered with SEBI and they function within the limits of strict regulations designed to protect the interests of investors. Also the Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework.

Framework for Mutual Funds:

Mutual Fund AMC

Mutual Fund AMC

Asset Management Company (AMC)

The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.

The largest AMCs by numbers:

ICICI 1491 schemes

UTI 1186 schemes

HDFC 1145 schemes

Reliance 1012 schemes

The AMC hires a fund manager, who buys and sells securities in line with the fund’s stated objective.

All AMCs Regulated by SEBI, Funds governed by Board of Directors

The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus. In addition, every mutual fund has a board of directors that is supposed to represent the shareholders’ interests, rather than the AMC’s.

So, now that we’ve presented our case, don’t you think you’re better of starting with Mutual Funds?

Start investing in one click with Fundexpert!

About the author

Subha Viswanathan

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