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What is Mutual Fund for Common Man

 Deepak Singh  08-11-2017   02-12-2017

 People believe that Mutual Funds are complicated, intimidating and difficult to understand. 

People believe that Mutual Funds are complicated, intimidating and difficult to understand. In reality, it is not so. A large number of investors pool their money for creating an investable corpus and share a common financial goal. The collected money is invested carefully in debentures, shares, other asset classes. The investment results in capital appreciation and income which is shared among the unitholders in proportion the units owned by them. Thus, mutual funds can also be described as a trust that benefits all those who have invested money into it. This is the reason; a mutual fund is considered as completely appropriate for the common man as it gives him an opportunity to invest in a diverse but professionally managed collection of securities at a low cost.

How is a Mutual Fund scheme started?

For the uninitiated, it is important to understand that a mutual fund is started by pooling money from a group of investors for investing in a comprehensive group of assets.

  • Usually, this money is invested in bonds or stocks and other single asset class, but it can also be invested into a variety of assets.
  • In the stock market, shares are purchased by investors from one another while in the case of mutual funds, direct purchase of units from the Fund house(AMC) is its important feature.
  • Since a person can directly purchase units from mutual funds, they can be easily redeemed and sold again to the fund at any time.

Thus a common man can easily invest in a mutual fund scheme and hope to gain excellent returns. The investor can also avoid risks that are usually associated with picking up or choosing suitable individual assets. He or she can enjoy the diversity of portfolio and associated benefits without spending a lot of time in managing them. Thus, it is an ideal investment option for a common man.

Units of Mutual Fund Scheme

NAV is the Market price per unit of the Mutual fund scheme. It can be understood in simple terms by considering a mutual fund as a large-sized fruit that is cut into many pieces. These pieces represent investors holding a single unit. If the cost of the fruit is Rs 50 and it is divided into ten equal parts, the value of each unit comes out to be Rs 5 per unit. In the same way, when a specified value gets divided equally among the issued units, it is referred to as NAV.

Common man investing into a Mutual Fund Scheme must understand that the money collected from the investors in the scheme is then invested into diverse securities thereby creating a portfolio.This portfolio has its own monetary value. Expenses are deducted from this monetary value to derive NAV.

To begin with, an initial NAV of Rs 10 is set for the investors. This is because the scheme collected funds have not been invested as yet. As the money starts getting invested, there is a change in the value of initial pool which depends on gains or losses sustained.

Benefits of Mutual fund

Investing in Mutual Funds has a lot of benefits, some of these are:-

Professional Management

Using Mutual Funds, the investors are allowed to pool their money and invest in different sectors. A professional fund manager manages this process and stock selection. These fund schemes are managed by a highly experienced fund manager who is adept at handling finances in a highly efficient manner. An individual investor cannot spare so much time and put in so many efforts to manage assets on a daily basis.

Exposure to Better Assets

When investing in a mutual fund scheme, an investor gets to enjoy exposure to different assets. The assets are chosen with great care, and they are high-performing assets. These assets form a part of a broad portfolio where some high-performing assets that are chosen by past performance, downside risk, charges and consistency of performance.

Diversification of risk

In Mutual Fund Scheme, the risk factor gets diversified as investments are allocated among different financial instruments, different categories, and industries. By using diversification technique, the risk can be minimised by making investments in varied areas that may respond differently to the same situation. Thus, if in any given situation, one sector is performing well and the other is under-performing, then return from under performing sector will be compensate by well performing sector.Although guaranteeing no loss is impossible to commit, investment professionals can help in maximizing returns and minimizing risks thereby achieving long-term goals.

Subject to Market Risk

When investing in any Mutual Funds Scheme, we come across a disclaimer stating that “Mutual Funds Investments are subject to Market Risks.” These risks are associated with changes in the equity investment, commodity-related risk and foreign exchange risk. The risks can be slightly more in case of Mutual Funds Schemes as it also includes reinvestment risks, default risks and more. Besides the nature of market risk, some other risks that can have an impact on the mutual fund scheme are the approach of fund manager and his capability, cut-throat competition among so many Mutual Fund Schemes, striving hard to grab the attention of the investors, and more can also pose a risk.

Liquidity

Liquidity means how quickly an asset can be converted into cash. In open ended Mutual fund schemes the investor can purchase & sell his MF units at any time on current available NAV so, the liquidity is very high in mutual fund scheme.

Transparency-Well Regulated

Mutual Funds are well-regulated and transparent about their investment. The SEBI & AMFI plays a very important role in protecting the interest of the mutual fund investor. While SEBI regulates the Mutual fund industry & tells them what should do & what’s not to do by Mutual fund companies regarding investor’s money. The AMFI plays a vital role in educating the investor & the distributor regarding mutual fund investments. The AMFI guide us about our rights so that we could not be a victim of mis-selling. This 50-year-old industry is well-managed and operates in a clear, defined way and transparent in dealings.

Tax Efficient

Mutual fund schemes are highly tax efficient. The taxation of equity fund & equity related funds are same as stock in share market. Equity related schemes includes balance fund, ELSS, Arbitrage fund etc. If holding period in equity fund is less than one year then short term capital gain will apply otherwise long term capital gain will apply. In Debt fund short term capital gain will apply before 3 years and after that Long term capital gain will be applied.

Investment strategy of Fund Managers

When a mutual fund holds on to a lot of cash and is not investing, it can be because they haven’t yet found optimal investment opportunities. This says a lot about their bearish attitude towards the market. On the other hand, if high investment in mutual fund scheme with very less amount on hold, and means that excellent investment opportunities have been found and the fund managers are making the most of these available opportunities by making the nearly full investment. This is referred to as the bullish sentiment towards the market.

Disadvantages

Every coin has another side and the same goes with the Mutual Funds. Certain disadvantages are investing in Mutual Funds. Some of them are-

  1. No Tailor made protfolio:- Mutual fund schemes are designed having a common investment objective. So, the individual investor can not choose stocks of the companies in which he/she wants to invest. Investor should do a thorough research before adding any of the mutual fund scheme to their portfolio.
  2. No control over cost :- Mutual Fund houses levy charges, and these expenses are incurred by the investors. These charges into mutual fund scheme is sometimes very high & investor has no choice except dealing with it.

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