Mutual Fund basics

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We all know the basic thing big fish can eat small fishes but small fish cant. But all the Small Fish came together then can survive from being eaten by big fish. Some what like we like to live in a social group not alone.

Like that if a small investor want to invest in the market then he has to follow stock prices sensex regularly  along with this he has the risk of loosing money due to his little knowledge and he has small amount of money that can be invested either in secure market or in share market.
So here is Mutual Fund came in the picture.

All person have different needs but everyone want to save his/her money for securing future. Type of needs may be

1. Having no knowledge but want to invest in market.
2. Having deep knowledge and money but no time to track and record.
3. Having some little saving and want to invest in good stocks with security.
4. want to save tax and want growth also
5. want liquidity in investing.

All above needs can be fulfilled by mutual fund. Mutual fund in nothing but a pool account where most of the amount collected from different type of small investors and then experienced fund manager invest the fund in good stock and security that give growth and fix return.

Fund manager chooses the best stocks, monitor them frequently due to this your wealth will increase in long term. Investing in a fund for maximum return one should wait for long period of time say at least 5 year ( Assumption) and should also check the risk rating along with previous track records.

The key benefit provided by a Mutual fund is it provides diversification. A mutual fund provides a diversified portfolio of various securities across different maturities and sectors, even with a small amount to invest with. This helps in considerable risk mitigation, enabling you to invest an amount as little as Rs. 1,000 at one go and still get the benefits of diversification. Trying to build a diverse portfolio by buying into shares I bonds of individual companies requires significantly larger outlay.

Apart from diversification of risk, Mutual Funds provide the following key benefits to you:

1) Professional Expertise: Professional money managers manage Mutual Funds. They have access to detailed company research, Indian and global economic data, understand how various data points and events affect your investments, and act to take advantage of the same. As they follow the markets regularly, this helps him to make much better decisions on where to invest rather than individual investors investing on their own. For example, a fixed income fund manager typically as a better understanding of the volatility of interest rates and can play the interest rate cycle better than a retail investor, thereby being more adept at optimizing returns.

2) Save time: Most of us work day-in and day-out in our jobs and do not have enough time to follow financial markets daily and do not have time to do proper research before investing. By investing in Mutual fund, you are actually able to save time as these tasks will be done by a professional fund manager who keeps an eye on the market at all times while you can continue with your work and need not put any extra effort in managing your investments.

3) Need only small amount to invest: Since there is a concept of pooling money from a large number of investors in Mutual funds, retail investors are not required to invest in huge amount to achieve required level of diversification. They can achieve diversification even by investing in small amounts. This is especially useful for retail investors who have very little amount to invest but need diversification and access to professional advice.

4) Tax Advantage: The dividend declared by mutual funds is completely tax-free in the hands of the investor (although after dividend distribution tax). Cost indexation for investment in a growth plan of mutual funds makes post-tax return of mutual funds more attractive as compared to other investments.

5) Liquidity: Mutual Fund companies buy back and sell mutual fund units at net asset value on a daily basis from an investor for all open-ended schemes. You can buy an open-ended mutual fund unit without having to worry about whether a liquid market is available for the underlying shares or the bonds. If a retail investor invests directly in equities, his ability to execute a trade {buy I sell) depends on the availability of a counterparty that is willing to take the opposite position (sell / buy). For many mid cap or small cap stocks in India, liquidity is a concern for retail investors. Similarly, secondary market in retail debt products is very shallow in India. This liquidity feature makes mutual fund investment very attractive to retail investors.

While we invest in various mutual funds seeking superior returns, keep on one thing in mind. An investment decision based solely on absolute return is not the right one for long-term investment for you. For example, while investing in a debt mutual fund, it is necessary for you to be aware of the credit quality of the fund's portfolio.

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DGfreebies Dg's Blog: Mutual Fund basics
Mutual Fund basics
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