Mutual Funds

Mutual Fund is a vehicle to mobilize money from investors, to invest in different markets and securities, in line with the common investment objectives agreed upon, between the mutual fund and the investors. Through mutual funds, an investor can get access to equities, bonds, money market instruments, and/ or other securities and they also avail of the professional fund management services offered by an asset management company.

How does it work?

A mutual fund is a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company. For an individual investor, having a diversified portfolio is difficult. Mutual funds help individual investors to invest in equity and debt securities simultaneously. When investors invest a particular amount in mutual funds, he becomes the unit holder of corresponding units. In turn, mutual funds invest unit holders’ money in stocks, bonds, or other securities that earn interest or dividends. This money is distributed to the unit holders. If the fund gets money by selling some stocks at a higher price the unit holders are liable to get the capital gains.

Role of Mutual Fund

  • Assist investors in earning income or building wealth
  • Mobilization of savings
  • Facilitating the infusion of capital into the economy
  • Market Stabilizer

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Benefits of Mutual Funds

Professional Management:-Mutual Funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds. Investing in the securities markets will require the investors to get into a lot of formalities. Mutual fund investment simplifies the process of investing and holding securities.

Affordable Portfolio Diversification:-Investing in the units of a scheme provides investors the exposure to a range of securities held in the investment portfolio of the scheme in proportion to their holding in the scheme. Thus, even a small investment of Rs.500 in a mutual fund scheme can give benefits to a diversified investment portfolio.

Economies of Scale:- Pooling of large sums of money from many investors make it possible for the mutual fund to engage professional managers for managing investments. Large investment corpus leads to various other economies of scale. Costs related to investment research, office space, brokerages, and other bank services. Thus, investing through a mutual fund offers a distinct economic advantage to an investor as compared to direct investing in terms of cost saving. 

Liquidity:- Investors in mutual fund schemes can recover the market value of their investments, from the mutual fund itself at any point in time. Schemes, where the money can be recovered from the mutual fund only on the closure of the schemes are compulsorily listed on a stock exchange. In Such schemes, the investor can sell the units through the stock exchange platform to recover the prevailing value of the investment.

Tax Deferral:-Mutual funds are not liable to pay tax on the income they earn. If the same income were to be earned by the investor directly, then tax may have to be paid in the same financial year.