Investing can be defined as the application of money or the value of money in a process that results in more money. In other words, multiplying the amount of money, resulting in channeling the same through a process that adds incremental value to the original amount.
There are many ways in which wealth can be created and multiplied. There are endless possibilities for investing, each with a distinct purpose and corresponding end result.One can invest in gold, or other precious metals like silver, platinum, etc. You can invest in raw materials like wheat, soybeans, corn, etc. invest in stocks of companies. Or one can invest in mutual funds (MF).
Definition of mutual fund (MF):
What is an MF? A mutual fund is a joint effort of Wealth Creation. In practice, a group of people come together and invest in a particular security / securities for the common good. This group of people is brought together institutionally in the form of a fund, or an agency that deals with their investment issues.
So it only makes sense that when a diverse group of people with different educational, cultural, economic and other backgrounds come together, there must be a common set of rules, customs and practices to achieve this. to harmony in their functioning, in order to achieve their common goal.
The legal constitution of a mutual fund (FCP) depends on the laws in force in the country of its creation. For example, in the United States, FPs have a special legal status. In India, they can be set up as asset management companies, with the trustees managing the day-to-day activities. These Trustees are competent individuals with a deep knowledge and understanding of the markets.
What MFs do:
MFs are dedicated to raising funds from members and investing them in various stocks, securities, bonds, etc. for the benefit of their members. Different strategies are followed by MFs depending on their investment philosophy and the investment channels they officially have.
Types of funds:
There are basically two types of funds namely growth funds and income funds. Apart from these, there is also the Tax Savings Fund.
A fund whose purpose is to ensure a regular income to its members during the period of validity of the plan. As a result, the MF chooses the type of businesses to invest in, which results in regular inflows of returns that are distributed among the members under the terms of the MF People who need a regular income and are able to make the required investment would find this type of MF beneficial.
As the name suggests, the MF's emphasis here is on growth. In order to achieve this goal, the MF invests in companies that are likely to experience rapid growth over a relatively short period of time. As a result, the risk factor associated with this fund is also high. Investors who are not risk averse and are willing to expect a decent appreciation of their investments, without demanding regular income, may choose to invest in this type of fund.
Tax Savings Fund:
Besides the two types of funds discussed above, there is another type of fund that an MF offers with benefits in the form of tax savings, rather than income and growth. The rationale for such a fund is "A dollar saved is a dollar earned".
Normally, these tax savings funds are managed under the auspices of a government tax relief scheme. That is, by investing in this type of fund, the investor is to some extent relieved of his fiscal responsibility. Investors whose primary concern is to reduce their tax liability would find this fund attractive.
Advantages of mutual funds:
Two heads are better than one! What happens in an MF is that several heads come together and exercise their minds for mutual benefit. Some of the benefits that MF members enjoy are:
Advantages of capital:
Suppose there are 100 investors who want to invest USD: 1000.00 each in a particular business. If they invested individually, each would do it up to their own limit, and each would benefit within the limited limit of their investment. On the other hand, if those 100 investors got together, pooled their investments and invested as one. entity, then their investment of $ 100,000.00 would pay off each of them, profiting from an investment of $ 100,000.00, instead of an investment of $ 1,000.00 .
Likewise, a mutual fund allows its members to invest in stocks and securities that would be beyond their reach as individual investors. Large-scale investments are made accessible to small investors by dividing the large investment into smaller parts or units.
Benefits of expertise:
A layman investor can get an idea of what to invest and what to do with his money. However, in order to maximize your returns and fully enjoy the benefits of investing, you need to have professional knowledge of the different investment vehicles, as well as a thorough understanding of the market and how it works.
This is where the expertise available with an MF comes in. MFs are managed by professionals who know their stuff. By investing in a mutual fund, the investor capitalizes on the expertise of the fund manager and reaps the benefits of his investment.
Benefits of diversification:
An investor, as an individual, may not be able to invest in a diverse set of industries, due to their limited resources. However, by investing in an MF, he benefits from investing in a representative sample of businesses and industries. In doing so, the investor, on the one hand, benefits from the recovery of any sector of the MF portfolio, and on the other hand, is not affected to a large extent. extent, due to the distribution of its funds across a variety of sectors.
Some of the other benefits of participating in an MF are the tax breaks available in certain funds. Apart from this, an MF offers liquidity, in that, subject to certain restrictions, an MF member can cash out their share of investment, should the need arise. In addition, the investor does not need to liquidate their entire stake, but only sell tradable lots, as specified, and keep the remainder of their portfolio. The investor thus enjoys the advantages of holding a diversified portfolio without actually investing in each sector individually.
MFs, as investment vehicles, have proven to be versatile, appealing to both small and large investors. They do not require the investor to be investment savvy to profit from it. In fact, they're aimed at people who either don't have a deep knowledge of the markets or can't devote the time and effort to research thoroughly before investing. .