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What are Mutual Funds?

Mutual Funds sahi hai.
Mutual Funds are subject to market risks. Please read all documents carefully before investing.

We have often read/heard about mutual funds on advertisements or by someone. But many people don’t know exactly what mutual funds are or how they work. So here is my explanation of what mutual funds are.

For any non-finance background person, the basic definition of mutual funds would be: its a pool of investments by many people investing small amounts. This is the generalised definition and yes, its correct.

How Mutual Funds work?
Suppose there are 100 people who want to invest Rs100/each. Now, they will give their money to a person who will take this amount (100*100= Rs 10000) and invest in different securities (such as Shares, Debentures, Bonds, etc).
The person who handles all the amount and allocates the investments is known as Fund Manager. The Fund Manager is appointed by the Asset Management Company(Mutual Fund House).
The investments of mutual funds can be SIP (recurring) or One time investment.

How do Investors Earn money?
The returns of mutual can be dividend based(in which the investor gets dividend every month/quarter/year) or growth based( investor doesn’t get any dividend, instead the dividend in reinvested and therefore the wealth compounds). The type of returns can be decided while choosing the mutual fund.

Pros:

  • Managed by Industry Professionals
  • The investor can check their investments through the mutual fund company’s website
  • Reduced Risk (as the sum is invested in different securities)
  • Variety of options to choose from
  • Investor can invest in securities where the minimum investment is high but retail investors can’t invest (since mutual funds have large number of investors, they can invest in securities that require high investment)
  • Minimum Investment amount starting from Rs 100.

Cons:

  • Mutual funds returns are volatile and based on markets. If markets are down, the investment can go negative.
  • Mutual Funds have high cost of transactions since they are managed by experts.
  • No control of investors as all the funds are managed by fund manager themselves.

FD or Mutual Funds?
This topic is quite debatable. However, in my opinion(and based on my investments), I believe for short terms (less than 1 year), one should choose for FDs. This is because, at current date, FDs offer somewhere around 6-7%. Due to volatility, Mutual funds can vary anywhere from 4-6%. Someone looking up to lock their money for 1 year, can go for FD. However, if someone has a financial goal to achieve over a longer period of time, they should opt for Mutual Fund.

For Eg: Canara Robeco Equity Hybrid Fund – Regular Plan – Growth has given 2439.85% returns since it started in the year 1998.

Mutual Funds must be picked up on the basis of ratings and past performances. If chosen correctly, they can provide a healthy and positive returns to accomplish financial goals.

Thank You 🙂
Please ask any questions if you have in the comment section.

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