What is meant by a Mutual Fund?

Of late, you must have come across the term - "Mutual Fund" quite often. You might have heard of Mutual Funds from your friends, relatives or through an advertisement. What exactly is a Mutual Fund and why is it becoming increasingly popular?

A Mutual Fund is an investment similar to a Fixed Deposit, Post office Deposit or a Stock. You invest in Mutual Funds expecting your investment to increase in value and provide returns over a period of time.

If Mutual Funds are just another form of investment, then what makes them any different? The major difference between a Mutual Fund and other traditional forms of investment is that - in Mutual Funds the money is pooled by thousands of investors and given to an experienced Investment Professional (Fund Manager) who decides where to invest based on the type of fund.

How exactly does this work?

A Mutual Fund starts by collecting money from investors. Let us say 10000 investors have each invested Rs. 10000 in the fund. So the total amount collected is Rs. 10 crores. This amount is then managed by a professional fund manager who invests it by purchasing shares and bonds depending on the type of Mutual Fund. For example - An Equity fund manager would invest in stocks that are expected to provide the highest returns. The profits from the investments are shared by all the investors.

What are the advantages of a Mutual Fund?

There are several advantages of investing in a Mutual Fund. Some of them are -

1) Expert Money Management

Your investments are managed by a professional who constantly monitors the performance. Since this is their primary occupation, they can devote considerably more time than an individual investor to select investments that can perform better. It also provides a peace of mind to investors when they know that their money is being managed professionally.

2) Convenient and Flexible investment process

One can start investing in Mutual Funds and track their performance completely online. You can invest manually in Mutual Funds or set up an automatic recurring investment (Systematic Investment Plans or SIPs). You can start investing in Mutual Funds with as little as Rs. 100.

3) Liquidity

Most Mutual Funds can be withdrawn anytime. The investor will receive the proceeds in his bank account within 1 - 3 working days. There is no lock-in period like in LIC or certain Fixed Deposits.

4) Wide variety of options

Investors can choose from a wide variety of funds as per their risk appetite, investment duration and financial goals. Each of these funds have varying levels of risk and different financial objectives (Eg - Liquidity, Tax Saving etc.)

Given the above, Mutual funds are one of the best investment options available for any type of investor!