What is a Mutual Fund?
A mutual fund is an investment instrument that pools money from numerous investors to invest in a diversified pool of securities such as equities, bonds, and other money market instruments. Mutual funds have become one of the most widely invested instruments as they make up for effective diversification, which spreads the risks across numerous securities and offers steady returns to investors. Among numerous investment instruments you can invest in, mutual funds ensure investment discipline through systematic investment over time. Since professional portfolio managers manage the investments, they carry lower risk than other investment instruments.
If you are an investor or are looking to invest to build wealth over time, it is ideal to add mutual funds to your portfolio. This blog will help you understand what is a mutual fund and how it can help you earn good returns in the long term.
What is mutual fund?
Mutual funds are a popular investment vehicle that many investors use to achieve their financial goals. They are a type of investment vehicle that pools money from multiple investors to buy a diversified portfolio of stocks, bonds, or other assets. This allows investors to access a range of different investments and diversify their portfolio, without having to purchase individual stocks or bonds themselves.
When you invest in a mutual fund, you are buying shares in the fund. The value of these shares is based on the performance of the underlying investments in the fund. The fund is managed by professional fund managers who make investment decisions on behalf of the investors in the fund.
What are the potential benefits of investing in mutual funds?
Mutual funds are popular because they offer the ability to easily invest in increasingly more complicated financial markets. A large part of the success of mutual funds is also the advantages they offer in terms of diversification, professional management and liquidity.
- Flexibility – Mutual Fund investments offer lot of flexibility with features such as systematic investment plans, systematic withdrawal plans, and dividend reinvestment.
- Affordability – They are available in units which make it very affordable. Because of the large corpus, even a small investor can benefit from its investment strategy.
- Liquidity – In open-ended schemes, you have the option of withdrawing or redeeming your money at any point of time at the current NAV.
- Diversification – Risk is lowered with Mutual Funds as they invest across different industries & stocks.
- Professional Management – Expert Fund Managers of the Mutual Fund analyze all options based on experience & research.
- Potential of return –The fund managers who take care of your Mutual Fund have access to information and statistics from leading economists and analysts around the world. Because of this, they are in a better position than individual investors to identify opportunities for your investments to flourish.
What factors should I consider before investing in mutual funds?
While reviewing your mutual fund options, be sure to evaluate your:
- Goals: What do you want from your mutual fund investment? Are you saving for your retirement, your children’s college or investing money for future generations? The answers to these questions can help you narrow down which funds would work best.
- Time horizon: Mutual funds are typically better suited for long term investors. If you think you’ll need your money in the near future, say within three to five years, then a mutual fund may not be the best option. This is because the return in that amount of time – once removing the cost of fees – may not be enough to make the investment worth it.
- Risk tolerance: Determine how comfortable you are with risk and invest accordingly. Understanding your risk tolerance can help you select funds with strategies and asset allocations that fit this profile.
What are some risks associated with mutual funds?
There are a couple of potential risks associated with mutual funds:
- Potential for loss of principal: Portfolio managers can’t guarantee the performance of the fund, creating potential for loss of principal on the investment.
- The diluting effect of diversification: At times, a fund’s diversification can have a diluting effect on positive returns. For example, if one stock in the fund doubles its share price, that’s not necessarily reflected in the fund’s overall return.
Please note,
The views in the article/blog are personal and that of the author. The idea is to create awareness and for educational purpose and not intended to provide any product recommendations.
