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What are mutual funds and advantages of investing in mutual funds?

Mutual funds combine the savings of a large number of investors and manage it as a single pool of money. Instead of investors worrying about which stock or bond or commodity to invest in, professional fund managers do the job.

For the individual investor who doesn’t have much time to study and research investments himself, mutual funds are a great way to reap the benefits getting easy access to different types of investments with a minimum effort and a relatively low minimum investment. In most funds, it is possible to start investing with as little as a thousand rupees or even less.

Also, unlike many other investments, mutual fund investments are highly liquid. This means that an investment can generally be withdrawn without any delay. When an investor wants to withdraw money from a mutual fund, he can put in an order on any weekday and he will generally receive the money in his account in a matter of few days.

There are many types of funds with a wide range of risk levels, profit potential, and quality of fund management. There are funds that invest in equities and there are funds that invest in bonds and there are funds that combine the two asset classes. They all offer varying degrees of risk and return. There are also funds that invest in gold and some have investments outside of India.

There are many advantages of investing mutual funds, which include:

Convenience: You can easily invest as well as withdraw from them in any amount. Investments can be made by filling up a simple form or even online with direct debit from your bank account. Similarly, redemptions can be made directly into your bank account and take no more than three days.

Diversification: One of the basics of safe investing is to spread your money across different investments. Mutual funds are an easy way to do this. Each mutual fund spreads the money across a large number of investments. In any well-managed fund, this spread is balanced not just across different companies but also across different sectors and sizes of companies, thus providing optimum safety.

Variety: There are mutual funds available for every kind of return and risk level and suitable for every kind of time horizon. No matter what kind of investment you want, there’s likely to be a variety of funds that suit you.

Professional Research and Management: Investing is a lot of work. There are hundreds of companies to track and their prospects could change without warning. While you could do it all yourself, you may not have the time or the resources to spare. Mutual funds employ professional, whole-time investment managers and research staff. Their cost and effort gets shared ‘mutually’ among all the investors in a fund.

Tax Efficiency: When you buy or sell any investment, you have to pay tax on the profit you make. However, this doesn’t happen when that buying and selling is being done on your behalf by a mutual fund. To maximise profits, the fund manager could keep buying and selling stocks as needed, but you have to pay tax only when you redeem your investments from the fund.

Transparency: Mutual funds are obligated by law to release comprehensive data about their operations and investments. Almost all funds release NAVs daily and most release their complete portfolio every month. Sebi regulates the fund industry very tightly and is constantly refining the applicable rules to protect investors better.

KEY POINTS

  • Mutual funds are an easy way for investors to gain the benefits of investing without having to do much research or analysis
  • Mutual funds also offer diversification, convenience, tax efficiency as well as many other benefits
  • There are mutual funds available for a wide variety of investing needs
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Mutual fund investments are subject to market risks, read all scheme related documents carefully.