Anupama Nair
What are mutual funds? A mutual fund is a type of “financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets”. Mutual funds are managed by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. The portfolio of mutual fund is organized and preserved to match the investment objectives stated in the prospectus of the company.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds capitalize in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund, derived by the aggregating performance of the underlying investments.
Now the question that you would ask is why mutual funds? The answer is, Mutual funds are the most popular choice among investors because they generally offer the following features:
- Professional Management: The fund managers do all the research for you and they select the securities and monitor the performance.
- Diversification: Mutual funds use the idiom “don’t put all your eggs in one basket.” It typically invest in a range of companies and industries. This helps to lower the risk if one company fails.
- Affordability: Most funds set a relatively low Rupee amount for initial investment and subsequent purchases.
- Liquidity: Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.
Mutual funds use money from the investing public and use that money to buy other securities, like stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy. “So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio's value”. Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stocks, mutual fund shares do not give their holders any voting rights. A mutual fund is both an investment and an actual company.
Mutual funds are divided into several categories, representing the kinds of securities they have targeted for their portfolios and the type of returns they seek. There is a fund for nearly every type of investor. The common types of mutual funds are money market funds, sector funds, alternative funds, smart-beta funds, target-date funds, and even funds of funds, or mutual funds that buy shares of other mutual funds.
