“What is Mutual Fund?” This might be your thought
whenever you see ads stating that “Mutual Fund Sahi Hai” (meaning mutual fund
is right). Is Mutual Fund, actually right? This can be properly understood only
when you know all about mutual funds. So, let us understand about Mutual Fund!
What are Mutual Funds?
A mutual fund is a trust that pools the
money collected from many investors who share a similar financial goal. This pool
of money is then invested in different financial instruments. The profit
generated from these investments is then divided among the investors.
Let us
understand this with the help of an example!
Think of Mutual Fund as a Pizza. You want to have a
pizza, but you don’t have enough money. Say, the pizza’s price is Rs.1000 but
you have only Rs. 400. Now, you are forced to quit your desire to eat pizza.
But think of a situation when you and some of your friends contribute some
amount to buy and eat pizza together.
Similarly, in Mutual Funds, you and other investors
contribute some amount to achieve similar goals.
Say, you want to invest Rs. 10000 (in April 2021) in
MRF. But each share of MRF costs more than Rs. 80,000 (April 2021). But if you
collaborate with some investors with similar goals you can still have a part of
the MRF Share.
Therefore, Mutual Fund is basically a pool of
investor’s money that is invested together to achieve similar financial goals.
How do Mutual Fund Functions?
Again, think of a Mutual Fund as Pizza. You want to
have a pizza that is going to cost you Rs. 1000 and has 10 slices. Assuming you
have Rs.400, you and your friends contribute some amount each. Say, you
contribute Rs. 400 and your three friends contribute Rs. 300, Rs.200, and
Rs.100 each. Accordingly, you will eat 4 slices and your friends will eat 3, 2,
and 1 slice(s) respectively. But the person who will go to the market to bring
pizza will get a little portion of pizza from each slice.
This is similar to what a mutual fund is. Basically,
what happens is that you and other investors like you give money to an AMC
[Asset Management Company], to invest it, on your behalf. AMC invests the money
in different financial instruments and generates profit. This generated profit
along with initial invested money is returned to the initial investors.
Obviously, AMC doesn’t do all this for free. They
charge a little from each of the investors.
This is basically how a mutual fund works.
So why should you invest in Mutual funds?
There are many positive reasons of you to invest in Mutual Funds. Some of them are more important and some of them are less.
The following are the advantages of Mutual Funds:
· Diversification: First and the
most important advantage of a Mutual Fund that I can think of is the ability of
the Mutual Fund to diversify your portfolio. If you invest directly into
companies [via stock market], then with the limited funds you cannot invest in
a large number of companies [i.e., your portfolio is less diversified].
But think of an AMC [Asset Management Company], which
has a large pool of money. They will be able to diversify your portfolio to a
larger extent. Therefore, MUTUAL FUNDS GIVES YOU AN INCREASED
DIVERSIFICATION.
· Professional Management: Investing in
financial instruments requires a considerable amount of research, skill, and
experience. And gaining all this is a very complex task. Above all many of us
don’t have enough time to do research and all.
This makes Mutual Funds an ideal way of investment. As
Portfolio of Mutual Fund is managed by dedicated professionals, who
generally have huge knowledge in this field.
· Lower Risk: Since with the
help of mutual funds, you diversify your portfolio, as well as your portfolio
is being managed by a Professional, all these things tend to reduce your risk
to a greater extent. Although it is advisable to read all the related documents
carefully.
· Government Oversight: Mutual Fund
providing AMC is regulated by government bodies carefully in many countries.
In India, SEBI is the organization that
regulates Mutual Funds providing AMC.
· Transparency and Convenience: In
India, Mutual funds are bound to report
their holdings at regular intervals. Along with this AMC is bound to report for
any kind of changes. This gives Mutual Funds a very transparent nature.
Other than this, investment in Mutual Funds can be
done at your own convenience, online, and with a few clicks with the help of
several regulated and government apps.
Among all these apps, I love to use while investing in Mutual Funds is UPSTOX. Through this app you can invest in stocks of different companies with ease. I personally invest in Mutual Funds and Stocks of different companies with the help of UPSTOX. This app gives me a lot of conveniences to invest in Mutual Funds as well as Stocks.
One another app that you should also try to invest in Mutual funds with the help of GROWW. I personally do not prefer investing in Stocks with the help of GROWW.
You might require to open a DEMAT Account.
If you want to invest in Mutual Funds or Stocks use our referral link to start investing. This will provide us the financial stability to continue writing the articles.
· Liquidity: Investing in
Mutual Funds has a higher level of liquidity as compared to many other
financial instruments. In general, you can get your money withdrawn into your
account within 2-3 working days.
Are there any disadvantages of Mutual Funds?
Yes, of course, there is nothing under the sky that
doesn’t have any disadvantages. But the thing that matters the most is the impact
of disadvantages. Following are few disadvantages of Mutual Funds:
· Costs Involved: When you
invest in mutual funds, AMC invests your money in various financial instruments
to generate growth. And in turn, AMC charges a little percentage of your money
called EXPENSE RATIO. The maximum value of the Expense Ratio is fixed in India
by SEBI.
Another kind of charge that is involved in Mutual Funds
is different kinds of Commission/Brokerage that is taken by the medium through which you
are investing in Mutual Funds.
This depends and varies on the medium through which you are investing in Mutual Funds. Some of them charge zero commission on Mutual Fund investment while other charges a few percentage of your investment.
· Cash Reserves Inefficiency with Mutual Funds: To
provide you with liquidity, AMC keeps a little portion of the total money as
cash. This money kept in cash is not generating any profit. Therefore, some
portion of your money is inefficient to generate any profit. Though it is a
very small portion of your money and to provide you with greater liquidity.
· Diversification: One of the
greatest advantages of a Mutual Fund is its Diversification. But, for those who
have enough knowledge to beat the fund manager of AMC, diversification is a
disadvantage.
· Trading Limitations: One big trading limitation of a Mutual Fund is that it cannot be bought or sold in the middle of the day. It can only be done at the end of the day.
· Dilution: Suppose a holding stock of a
certain Mutual Fund, doubles its value in 6 Months. But the value of Mutual
Fund will not double as this particular stock is only a small part of the Mutual
Fund’s holding.
My Opinion:
I consider a Mutual Fund as a great tool of
investment. The first thing I did before investing in Mutual Fund was going
through all the details. I thought investing in Mutual Fund is a heckling task
to do but with the help of apps like UPSTOX and GROWW, I invest in Mutual Fund with ease and at single
a click.
I would also refer you to try investing in Mutual Funds and stocks with the help of UPSTOX. One another app that you may like to use is GROWW.
One another thing that needs to be considered is the
importance of Saving before starting to invest. Therefore, it is considerable
to know the process of effective saving.
Some articles you may like:
11 Reasons Why You Will Never Be Rich
How Do Banks Calculate Interest On Savings BankAccount?
If you want to invest in Mutual Funds or Stocks use our referral link to start investing. This will provide us the financial stability to continue writing the articles.
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