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Mutual Fund

A mutual fund is a collective investment vehicle that pools investors' capital and makes investments in various financial instruments such as stocks, bonds, commodities etc. Each investor then owns shares in the fund, which represent a portion of the fund's holdings. Mutual funds are managed by financial experts known as Fund Managers who handle investments on the behalf of the fund, picking and investing in instruments that optimize the fund's returns.

Putting it simply, if an investor is looking to buy shares in several companies but lacks the expertise or time to make such investments; they can buy units of a mutual fund instead which hold shares in different companies. Buying a mutual fund share is akin to holding a slice of pizza with many toppings. The investor gets a share of the fund's gains, losses, expenses and income in proportion to his holdings. Just like a stock's price indicates its performance, a per-unit price called Net Asset Value (NAV) is used to track the fund's performance. The NAV is calculated by the Asset Management Company (AMC) at the end of each business day.

Advantages of Mutual Funds:-



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Professional Management

Mutual funds are managed by experienced and professional fund managers who have expertise in picking the best stocks for optimal risk-adjusted returns.

Diversification

Mutual funds enable investors to diversify their risk by providing a portfolio of stocks in unrelated sectors. A diversified basket of stocks reduces the risks inherent in specific stocks and industries. While an individual investor would require significant capital to create a well-diversified portfolio, they can instead buy units of diversified equity funds that have minimum investment requirements of as low as 5,000.

Convenient Administration

Convenient Administration For First time investors, after getting KYC done and creating a folio, all transactions like purchase, switch and redemption can be done online, without minimal hassle to the investors. In mutual funds, there is no administrative risk as all folios are linked the PAN Card and investor's bank account, so the investment cannot be transferred to another person's name.

Rupee cost averaging

Return Potential With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment's unit price. As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.

Low costs

Due to the fact that mutual funds trade securities in large volumes, the transaction costs on a per-unit basis is far lower than those involved in direct trading of stocks.

Liquidity

Open-ended mutual funds offer high liquidity to its investors. Investors are free to fully or partially redeem their units at any point in time, with a standardized redemption procedure across all funds.

Transparency

The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unitholder, you are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy. AMCs disclose their portfolio details at regular intervals. Investors can view the portfolio of the fund they have invested in. Simple one pager account statements are sent to investors when investment is made and as and when requested by the investor.

Flexibility

Mutual funds also offer flexibility in terms of the modes of investment and withdrawal. Investors are free to choose from different investment modes such as systematic investment plans, lumpsum, systematic transfer plans, etc.

Choice of schemes

Mutual funds offer an array of products that cater to different risk appetites and investment objectives. For instance, apart from equity funds there are debt funds, balanced funds, index funds, etc. to suit the needs of every investor.

Tax benefit

Mutual funds provide some tax benefits over and above those available when investing in equity. Long-term capital gains on sale of equity-oriented mutual funds are tax exempt if the holding period exceeds 1 year. This means the small portion of debt securities in the fund also gets this benefit.

For debt funds having holding period more than 3 years, the long-term capital gains are taxed at 20% with indexation which leads to a far lower effective tax rates, especially for investors in the higher tax bracket. Further Arbitrage funds provide high security of capital (as debt funds) but are treated as equity funds, thus, capital gains are exempt after 1 year.

Well regulated

All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI. Mutual funds all over the world are highly regulated. The fund manager has to submit all necessary documents to the statutory authorities for their approval, to make investment in required securities. after 1 year.