A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.
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Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:
(www.amfiindia.com) [online] Anybody with an investible surplus of as little as a few thousand rupees can invest in mutual funds by buying units of a particular mutual fund scheme that has a defined investment objective and strategy. The money collected from the investors is invested by a fund manager in different types of securities. These could range from shares and debentures to money market instruments depending upon the scheme’s stated objectives.
The benefits of investing in mutual funds can be detailed as under: Affordable: Mutual funds can be bought by anyone and everyone. An investor can initiate his investment with Rs. 1,000/- as well. There is no specific minimum investment amount required. Professional Management: For retail investor, to decide which securities to buy and the required investment amount, is very difficult. Investing in a mutual fund gives the investor an edge, as it is managed by professional fund manager, who makes the necessary decisions as to which security to buy, how much to invest, when to buy and sell. These decisions are made after doing an in-depth market research about the economy, industries and companies. Diversification: Spreading the investments across the sectors, industries and securities reduces the risk; this is the basic of finance theory. A mutual fund is able to diversify more easily than an average investor across several companies, which an ordinary investor may not be able to do. With an investment of Rs 5000, you can buy stocks in some of the top Indian companies through a mutual fund, which may not be possible to do as an individual investor. Convenient administration: There are no administrative risks of share transfer, as many of the mutual funds offer services in a demat form which saves investor’s time and delay. Higher returns: Over a medium to long-term investment, investors always get higher returns in mutual funds as compared to other alternatives of investment. This is already seen from excellent returns, mutual funds have provided in the last few years.
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