INTRODUCTION

Mutual Fund is a trust that pools together the resources of investors to make a foray into investments in the capital market thereby making the investor to be a part owner of the assets of the mutual fund. The fund is managed by a professional money manager who invests the money collected from different investors in various stocks, bonds or other securities according to specific investment objectives as established by the fund. If the value of the mutual fund investments goes up, the return on them increases and vice versa. The net income earned on the funds, along with capital appreciation of the investment, is shared amongst the unit holders in proportion to the units owned by them. Mutual Fund is therefore an indirect vehicle for the investor investing in capital markets. In return for administering the fund and managing its investment portfolio, the fund manager charges fees based on the value of the fund’s assets.

Mutual Benefits 

How does a mutual fund work? 

Investing in mutual funds is an expert’s job in the present market scenario. A systematic investment in this instrument is bound to give rich dividends in the long-term. That is why over 2 crore investors have faith in mutual funds. 

What is a Mutual Fund 

A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. A mutual fund is the most suitable investment for the cautious investor as it offers an opportunity to invest in a diversified professionally managed basket of securities at a relatively low cost. So, we can say that Mutual Funds are trusts which pool resources from large number of investors through issue of units for investments in capital market instruments such as shares, debentures and bonds and money-market instruments such as commercial papers, certificate of

deposits and treasury bonds. 

Who can invest in Mutual Funds 

Anybody with an investible surplus of as little as a few thousand rupees can invest in mutual funds by buying units of a particular mutual fund scheme that has a defined investment objective and strategy. 

How Mutual Funds work for you 

The money collected from the investors is invested by a fund manager in different types of securities. 

These could range from shares and debentures to money market instruments depending upon the scheme’s stated objectives. 

The income earned through these investments and capital appreciation realized by the scheme are shared by its unit holders in proportion to the units owned by them. 

(please refer the diagram above) 

Should we invest in Stocks or Mutual Funds? 

As soon as you have set your goals and decided to invest in equity, the question arises should you invest in stocks or mutual funds? Well, you need to decide what kind of an investor you are. 

First, consider if you have the kind of disposable income to invest in 15-20 stocks. That is how 

many stocks you will have to invest in if you want to create a well-diversified portfolio. Remember the familiar adage: Do not put all your eggs in one basket? If ` 5,000 were all you have to spare, it would be impractical to invest it across many stocks. 

Many beginners tend to focus on stocks that have a market price of less than ` 100 or ` 50; that should never be a criterion for choosing a stock. Also, brokerage could eat into your returns if you purchase small quantities of a stock. 

On the other hand, you would be able to gain access to a wide basket of stocks for ` 5,000 if you buy into a fund. Investing in funds would also be an easy way to build your equity portfolio over time. 

Let’s say you can afford to put away only ` 1,000 a month in the market. You can simply invest in a fund every month through a systematic investment plan (SIP) as a matter of financial discipline. You can save yourself the trouble of scouting for a stock every month. 

That brings us to the next point. Do you have the time to pick stocks? You need to invest a considerable amount of time reading newspapers, magazines, annual reports, quarterly updates,

industry reports and talking to people who are familiar with industry practices. Else, you certainly won’t catch a trend or pick a stock ahead of the market. How many great investors have you heard of who have not made investing their full-time job? 

Further, you may have the time, but not the inclination. You have to be an active investor, which means continuously monitor the stocks you pick and make changes – buy more, cut exposures – depending upon the turn of events. These actions have costs as well. As you churn your portfolio, you bear expenses such as capital gains tax. Funds do not pay capital gains tax when they sell a stock. 

All this assumes you know what you are doing and have the skill to pick the right stocks. You are likely to be better at investing in an industry you understand. Only, too bad if that industry appears to be out of favour in the market. 

If you love the thrill and the ups and downs that the stock market offers; if you find yourself turning into business channels and scouring business papers hoping that you can pick the next Infosys; if you have an instinct for spotting stocks and, importantly, the discipline to act on it; if you have the emotional maturity to cut your losses when you are ahead, then you can trust yourself to invest in stocks. 

Otherwise, hand over your money to the professional. Mutual funds could be the best avenue for the risk-averse Investors.