Investing in a mutual fund is like an investment made by a collective in a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people called fund managers and invests their money in stocks, bonds, and other securities. Fund managers are expected to honor this promise. The SEBI and the Board of Trustees ensure that this actually happens.
An individual as a single investor is likely to have a lesser amount of money at disposal than a group of friends put together.Now, let’s assume that this group is a novice in investing and so the group turns over the pooled funds to an expert(fund manager) 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.
- Mutual funds give a chance to investors to earn an income or build their wealth through professional management of their investible funds.
- Even a small investment of Rs. 500 in a mutual fund scheme can give investors a diversified investment portfolio so that there is a reduction of risk in investment.
- Large investment corpus leads to economies of scale since individual investors cannot afford to engage professional management and costs related to investment research and office space get spread across investors. Also, higher transaction volume helps to negotiate better terms with brokers, bankers and other service providers.
- Mutual funds offer options, whereby, it is possible for the investor to defer the tax liability. Investors can legally build their wealth faster as compared to the case where they had to pay tax on the income each year.
There are systematic approaches to Systematic Investment Plan (SIP), Systematic Transfer Plan(STP) or Systematic Withdrawal Plan (SWP) offered to investors to promote investment discipline to create and protect long-term wealth.
Read more about SIP, STP, and SWP
Read more about Types of Mutual Funds