The two prominent questions that come in every investor’s mind are what is a mutual fund? What are the benefits of investing in a mutual fund? Your financial requirements are likely to grow over time. Although your income may grow at a steady pace, inflation will take its toll. Traditional forms of investments such as bank FDs, gold, or bank savings may not help you realize your financial dreams and life goals.
The million-dollar question that you now need to ask yourself is how would you derive maximum benefits from your surplus funds. How will you achieve your dream of buying a car, own home, or special vacation? There seems to be only one answer – Mutual Funds.
A mutual fund is a collective investment tool that pools together money from many investors. A professional fund manager will carry out in-depth research and park these funds in different asset classes to optimize your investments. Mutual funds allow an individual investor to take part in the stock market without having to monitor the market movements regularly. You could invest your money on tax savings mutual funds such as ELSS or NFOs and SIPs.
The fund manager takes your money and invests in a wide range of stocks, fixed income investments, or debt. Fund managers use the popular and effective technique of diversification to counter market fluctuations while minimizing market risks. Therefore, if a particular group of stocks in a portfolio does not do well at a given point of time, there is a possibility that the loss is balanced or minimized owing to better performing stock in that particular portfolio.
Once you have invested your money in a mutual fund, you will be provided with units in the fund based on the amount you have invested. For instance, if you have invested Rs. 200,000 in a mutual fund at Rs. 10 per unit, you will be provided with 20,000 units. The best thing about mutual fund units is that they are easily and quickly redeemable at Net Asset Value (NAV), which makes mutual funds a highly liquid asset class.
NAV represents the value of one unit of your investment in a mutual fund after paying all the fund management fees. NAV multiplied by the number of units gives you the value of your investment in a mutual fund. You can invest in a mutual fund in lump sum or through enrolling for SIP.
Following are the benefits of investing in a mutual fund:
• Professional management of your investment portfolio
• Increased diversification of your portfolio
• High levels of liquidity
• Ability to participate in investments that may be available only to larger or institutional investors
However, you must always remember that mutual fund investments are subject to market risks. Therefore, you should read all the offer documents carefully before investing your hard-earned money.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.