Thanks to the advertising blitzkrieg, most of you must have already heard of mutual funds and the promising investment opportunity they offer. But some of you perhaps do not know anything more than this: “Mutual fund investments are subject to market risks. You should read all the scheme-related documents carefully”. In case you want to know what exactly mutual funds are — read along to learn more.
What is a mutual fund?
A mutual fund is an investment tool where many individuals pool their money to invest in financial securities such as stocks. It is a fund managed by professionals known as portfolio managers or fund managers. One of the many benefits that investors get is that these give them the opportunity to access a professionally-managed portfolio.
The profit or loss on the investment is shared among the entire group in proportion to each investor’s contribution. Thus, there is a division of risk if the investment goes down, making it among the most feasible bets for small account holders. In addition, mutual fund investors are also eligible for some tax benefits under Section 80C of the Income Tax Act.
How do these work?
The price of a mutual fund is referred to as Net Asset Value per share. Mutual fund shares are quite different from the shares of stock. A share of a mutual fund is an investment in multiple stocks (or other securities) rather than stock holdings of just one company.
There are various types of mutual funds differentiated on the basis of asset classes, investment objectives, etc. Some popular types are equity funds, hybrid funds, liquid funds, growth funds along with others.
Mutual fund investors earn revenue from a multitude of streams as a benefit of portfolio diversification. This includes the dividend on the security when its value increases or from capital gain by selling a share at an increased price.
How to invest?
Investing in a mutual fund is fairly easy. One can start by choosing and signing up with a broker, completing KYC (Know Your Customer), and paying a fee levied by the broker for their services.
Before you start trading, it is vital to first set financial goals, familiarise yourself with the prospectus of different brokers and then invest suitably. This helps reduce the risk considerably and can keep you safe from avoidable losses.