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Mutual Funds

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.

Mutual funds were created to make investing easy, so consumers wouldn't have to be burdened with picking individual stocks.

Mutual Fund is a vehicle that enables a collective group of individuals to:

    Pool their investible surplus funds and collectively invest in instruments / assets for a common investment objective.

    Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have

    Benefit from the economies of scale which size enables and is not available on an individual basis

imagesNow, let's assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The AMC invests the investors' money on their behalf into various assets towards a common investment objective.

Hence, technically speaking, a mutual fund is an investment vehicle which pools investors' money and invests the same for and on behalf of investors, into stocks, bonds, money market instruments and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by a professional manager (commonly known as fund managers). The fund managers are expected to honour this promise. The SEBI and the Board of Trustees ensure that this actually happens.

Professional Management : Mutual funds business is managed by highly skilled professionals whose job and responsibility is manage money. Thus they tend to do a better job as compared to most individuals.

Diversification : One particular scheme of a mutual fund invests in fairly diversified set of assets, like a debt mutual fund will usually invest in 15-20 varied instruments, so would a equity fund do in 50-60 stocks. Thus the risk is widely spread.

Informed decisions : Since the money is managed by a team of skilled professionals, these people meet the managements, competitors, understand the financial statements in great details, talk to various market participants, and thus they are better positioned to take well informed decisions.

Efficient cost : Since mutual funds work on the concept of pooling of resources, their costs are very low as the volumes are pretty large. Also, their fixed expenses are very low as they do not have many branches or huge sales teams, as compared to banks or insurance companies.

Liquidity : Most of the mutual fund units are highly liquid, as one can get withdrawal payment back in max. 3 working days.(Except ELSS mutual funds, which have a mandatory lock in period of 3 years).

Well regulated : Mutual funds are very well regulated by SEBI and they have to follow their strict audit, investment and compliance rules.

Tax benefits : Mutual fund investments are categorised as securities and thus they attract capital gains tax. The applicable short term capital gains tax is as per one’s current tax bracket and long term capital gains tax is 10% for debt and NIL for equity oriented schemes. ELSS schemes also offer tax benefits u/s 80 C.

Return potential : Since debt mutual funds invest in market linked instruments, they tend mirror the returns at current prevailing interest rates of the markets. If one wants to beat the inflation, then he can invest in equity schemes, which are well diversified, have good managements and sound performance track records.

Liquid Fund : Liquid fund is a category of mutual fund which invests primarily in money market instruments like certificate of deposits, treasury bills, commercial papers and term deposits. Lower maturity period of these underlying assets helps a fund manager in meeting the redemption demand from investors.

Debt Fund : A debt fund is an investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt.

Hybrid Fund : A hybrid fund is a category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and bonds, which can vary proportionally over time or remain fixed. Morningstar separates hybrid funds into domestic hybrid and international hybrid categories.

Equity Fund : A stock fund or equity fund is a fund that invests in stocks, also called equity securities. Stock funds can be contrasted with bond funds and money funds. Fund assets are typically mainly in stock, with some amount of cash, which is generally quite small, as opposed to bonds, notes, or other securities.

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