Mutual Funds
MF is a mechanism to pool the money from Investors who wishes to save the money and investing the same into securities through professional management in accordance with the objective of the offer documents.
Basically their are three major types of MF's
- Equity Funds
Funds that have a mandate to invest into stocks of public limited company in accordance with its objectives. Generally the investment objective here is to attain Long Term Capital Growth. Equity Funds can future be divided into LargeCap's, MidCap's, Multi-Caps. Balanced etc. - Fixed Income Funds
Fixed Income Funds invests in Bonds or debt securities. Their purpose is to provide safety and returns on regular basis. They invest primary into Goverment or corporate debt. - Money Market Funds
The money market funds consists of short-term debt instruments, mostly Treasury Bills. This is a safe place to park your money. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average Certificate of Deposits.
Why Mutual Fund?
Earning - Inflation = Real Return
i.e. You invest in a scheme where you get 8% return on your investment. Now if we consider 6% inflation, you real rate of return would be only 2% (8% - 6% inflation) Is it enough to achieve your different goals of life?
Invest in ups & downs (Value averaging)
Who does not wish to purchase stocks at a lower price and sell it at a higher price? No one knows whether any given time is the right time to buy or sell? A more successful strategy is 'Rupee Cost Averaging' wherein you invest a fixed amount regularly. Thus you purchase more when the prices are low and purchase less when the prices are high. SIP investments take advantage of this strategy
Power of compounding
Just think, you are investing Rs. 10,000 per month in Postal Scheme for 30 years. You will get Rs. 1.5 Cr at the rate of 8% whereas Mutual Fund Equity scheme can give you Rs. 23 Cr (At 15% CAGR)
Advantages of investing in Mutual Fund
Professional investment management
Diversification
Low cost
Convenience
Flexibility
Liquidity
Transparency
Variety
Tax benefit