On an average, Indians save around 10% of their income, with the savings rate forming around 30% of the country’s GDP. This percentage is considered one of the better ones in the world. However, when it comes to actual investments, most people in the country fall on the other side of the spectrum. The reason lies in the simple fact that they consider savings accounts (or at most fixed deposits) as viable investment options. This happens because most of them have little to no idea about other safe investment avenues available to them.
As such, it is important that they learn more about investment avenues that give them better returns and are both safe and secure. This is what serious investors look for when they scout good investment opportunities.
Looking at present financial distribution system and quality of advice available in the market, mutual funds are great investment options that help a lot to investors in realising their financial goals. This article shall look at these safe and stable investment avenues in some detail.
Mutual Funds: Synopsis
A mutual fund can be called a mechanism of pooling resources from the public and investing the collected funds in accordance with the fund objective. In other terms, a mutual fund is an investment scheme which is professionally managed and is run by an assets management company that invests the money of a group of investors in stocks, bonds, and other securities. Investing in a mutual fund is easier than individually buying and selling of shares, stocks and bonds.
Often, people tend to confuse mutual funds with equity investments even though they are both completely different vehicles. Mutual funds offer investment options ranging from 100% debt to 100% equity as well as hybrid products that combine both equity and debt. Mutual funds also came out with Gold Exchange-Traded Fund (ETF) and Gold Funds, which are better investment options as compared to owning physical gold.
Investing in mutual funds helps you to diversify your portfolio across a large number of securities to minimise any risk. As an investor, you can purchase a mutual fund unit that represents your share of holding in a particular scheme. These mutual fund units can be further purchased or redeemed as needed at the current Net Assets Value (NAV) of the fund. These values are not constant and keep fluctuating in accordance with the funds holding. Each investor who has purchased a mutual fund holding shares the gain and loss of the funds proportionately.
Mutual Funds: Benefits
Mutual funds are reliable and safe investment options for people who wish to save and grow their money. They offer several benefits to the investors of which some are discussed here.
- The most significant advantage of investing in mutual funds is that people get access to a professionally-managed and diversified portfolio of equities, bonds and other securities. It would be quite challenging to create such an investment on their own with a small amount of capital.
- Mutual funds permit the investors to put in small amounts of money and still reap the benefits of investing a large pool of cash since many investors jointly hold a mutual fund. They jointly share in the gains and losses incurred by the mutual fund, proportionate to the amount they have invested in the fund.
- Mutual funds are monitored and managed by qualified professionals who create a strong portfolio for the investors. This diverse portfolio consists of stocks, bonds, money market instruments or a combination of all of those financial products.
- Mutual fund investment schemes are also transparent in their nature. The Net Asset Value (NAV) is declared daily and the portfolio of the schemes is also made available every month. There are many agencies that rate the mutual fund schemes depending on risk and reward attached to them.
Mutual Funds: Types
There various types of mutual funds categorised based on factors such as risk, assets management, speciality, benchmark, structure and their investment objectives. Some of the most common types of mutual funds are:
- Open-end Funds: In this type of mutual funds, units are open and available for subscription throughout the year. They are not listed on the stock exchange. Basically, these funds allow investors to keep the investment as long as they want. There are no limits on how much can be invested in the open-end mutual funds.
- Closed-end Funds: A closed-end mutual fund is the one in which holdings can be purchased only during the initial offer period. These mutual funds are also listed on the stock exchange and have a fixed number of shares outstanding. They also operate for a fixed duration. The investors can redeem their units only during the specified dates.