A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.
MFs emerged in the USA many years' back because of the inefficiency of the banking system there. Banks would take money at deposit rates and lend it out to various corporate investors. But there was a huge gap between the rates at which they were willing to take money from individual investors and the rates at which they would lend to huge corporate borrowers. In such a situation a lot of retail investors were willing to go out and lend directly to corporate borrowers. They figured the risk was acceptable. Lots of corporate borrowers also felt that rather than borrow from banks at preposterous rates, they would do much better to access individual investors directly. The catch was that the ticket size of individual investors was very small. For a corporate borrower to transact directly with individual investors would mean running up a towering transaction bill.
This was when the concept of a mutual fund emerged, whereby an entity with very high levels of efficiency, no capital adequacy ratio's, extremely low costs and not maintaining any priority sector lendings or government bonds etc, could pool everybody's money together and lend it out to a AAA company. Of course, in such an eventuality the concept of getting a return guaranteed became endangered. Because individual investors in the mutual fund would then have to risk a portfolio that some anonymous mutual fund manager put together. This brought in a new requirement for diclosures. Investors who took such a risk wanted a very high level of transparency. They wanted disclosures at any given point in time. They wanted to know where their money was being invested.
Naturally there is a feeling of uncertainty or cautiousness you feel when you’re handing over your savings to somebody. You obviously need to be able to trust the person and you definitely want to know what is happening with your money, at all times. In the case of Mutual Funds, your money is handed over to a professional, whose entire job is to keep track of markets and look out for the best opportunities for you. What’s more, Mutual Funds publish a monthly fact sheet which basically lists out all the important facts you need to know about the scheme you’ve invested in.
These facts are:
Your portfolio of holdings, that shows details of the companies and the amount invested in each company and the rating of the company’s issuance in case the instrument is a debt instrument.
Past returns, dividends and performance ratios.
In addition, the NAV is published on AMFI and on each of the fund company websites on a daily basis, ensuring that you’re always in the loop about your investments.
Long-term investments have a slight advantage, but that doesn’t mean that Mutual Funds are only for such investors. In fact, there are various short-term schemes where you can invest from a day to a few weeks.
At the cornerstone of investing is the basic principal that the greater the risk you take, the greater the potential reward. Or stated in another way, you get what you pay for and you get paid a higher return only when you're willing to accept more volatility. Risk then, refers to the volatility – the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors – interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock we invest in will fall substantially. But it is this very volatility that is the exact reason that you can expect to earn a higher long-termreturn fromthese investments than froma savings account. Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. So risk has two sides: it causes the value of your investments to fluctuate, but it is precisely the reason you can expect to earn higher returns. You might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat inflation over the long run.
Mutual Fund is a vehicle that enables a collective group of individuals to:
Investing in a mutual fund is like an investment made by a collective. An individual as a single investor is likely to have lesser amount of money at disposal than say, a group of friends put together. Now, let’s assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The AMC invests the investors’ money on their behalf into various assets towards a common investment objective.
Hence, technically speaking, a mutual fund is an investment vehicle which pools investors’ money and invests the same for and on behalf of investors into stocks, bonds, money market instruments and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by professional managers (commonly known as fund managers). The fund managers are expected to honour this promise. The SEBI and the Board of Trustees ensure that this actually happens.