What is a mutual fund? How does it work?

Mutual Fund Investing is the most perplexing and poorly understood topic after stock market trading. The term “investing” itself is riddled with misconceptions and myths.

What exactly are mutual funds? Assume you are an investor who needs to invest in the stock market but only in blue-chip companies such as Reliance, HDFC, TCS, and Infosys. And the issue here is that blue-chip company stocks are prohibitively expensive for your investment budget. If you only have Ras 10,000 to invest, you will be able to buy the stocks of only 1-2 blue-chip companies, which will not diversify your portfolio.

So here come the Mutual Funds or Asset Management Companies (AMCs), which mist the investors who have the same investment goals as you and bring them together by collecting their investment amounts in one place and investing in the scheme with Sam Goals.

Whereas you might only be able to invest in 1-2 stocks from your investment, with the help of mutual funds, you can invest in the stocks of multiple blue-chip companies. Mutual funds pool the savings of many investors and manage them as a single pool of money.

Mutual Funds invest your money in equities, debts such as bonds, government securities, commodities, and other securities using various schemes. Mutual funds are managed by mutual fund companies, also known as asset management firms (AMC ). And each AMC runs a number of fund schemes that must be created for various investment goals.

To achieve all of these investment goals, AMCs frequently employ well-planned and well-tested strategies, and it is the responsibility of the “Fund Manager” to implement a fund’s investing strategy and manage its portfolio trading activities. This fund manager can be one person, two people as manager and co-manager, or an entire fund management team.

When compared to direct investing in stocks and bonds, there are numerous advantages to investing in mutual funds. Except for one, which is the cost of investing in information technology. However, we will discuss costs in subsequent videos; first, let us discuss benefits. It is very inexpensive to invest in; you can begin with a minimum of Rs 500 and a well-diversified portfolio. Investment is also very simple in this case; you can invest by filling out a single form or transferring funds from a direct online bank account, which usually takes 3 to 10 days and then appears in your bank account.

As a result, as investors, we all prioritise the concept of diversification. A well-diversified portfolio can significantly reduce your risk. And you can easily accomplish this with Mutual Funds. By investing in multiple companies, mutual funds can diversify more easily than the average investor. As an individual investor, you cannot invest in stocks of some of the top companies with less than Rs 500.

The difficult decision for the average investor is deciding which securities to buy, how much to buy, and when to sell. There are hundreds of companies to track, and their fundamentals change over time, so if you go to track it yourself, it may be that if you do not have successful time or efficient resources, then track everything.

When you buy mutual funds, you also get a professional fund manager to manage your money. Who will make the decisions about what to buy, how much to buy, and when to sell? Fund managers are professionals who write various factors, conduct research on the economy, industries, and businesses, and make decisions.

Most mutual funds charge a “Management Fee” for providing this service. & this fee is distributed among all fund investors. After a good investment, we check to see if it is liquid, which means that you can withdraw your investment amount when needed. According to SEBI rules, every mutual fund must provide liquidity, which can take various forms depending on whether the scheme is open-ended or closed-ended. There is no bond in open-end schemes, so you can invest or redeem at any time with AMCs. Closed-ended schemes are for a set period of time, and you can only invest in them when new funds are introduced.

Another type of scheme is ELLS, which stands for Equity Linked Savings Schemes and has a three-year lock-in period. In addition, you can save tax on your investment under Section 80C of the Internal Revenue Code. However, you will be unable to redeem your investment for three years.

Depending on the return and risk level, as well as the investment time horizon, almost every type of Mutual Fund Scheme is available. In short, Schemes are available in a variety of forms for almost every investment goal. Don’t worry, we’ll go over this in more detail in the following videos. When you buy or sell an instrument, you must pay a profit tax to the government. (I’ve now created an entire playlist about this taxation, which you can find somewhere on the “I” button.)

If done correctly, mutual funds can also be a tax-efficient investment. (The tax benefits will be covered in future videos, so don’t worry.) Every Mutual Funds company is now well-regulated by the Securities Exchange Board of India, which also regulates our stock market.

Furthermore, mutual funds are required by law to disclose all comprehensive data about their operations and investments. Almost all mutual funds publish the Net Asset Value of their funds every day, and the complete portfolio data is published at the end of each month.

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