Mutual funds are, nowadays, becoming highly popular among investors. We see a lot of ad campaigns running on TVs, YouTube and social media about mutual fund (MF) schemes. Mutual funds (MFs) are more talked about in the context of the share market/stock market. But, in reality, mutual funds offer a variety of investment options in different types of assets and not just shares.

Mutual fund and AMC

The Mutual Fund is an investment scheme, or we can call it a financial instrument. It is a different way of investing than the traditional one. They collect money from people who are willing to invest their money. They collectively invest that pooled (collected) money in bonds, Govt. securities, the stock market, gold, etc.

Example –
- A person collects Rs.10 crore from a number of investors. She invests that money in gold, stock market, Govt. securities, bonds and real estate. She invested Rs.2 crore in each of these assets.
- The Calculation of profit –
  - an average of the ‘returns on each asset’ will be the overall return of that particular mutual fund.
- The investors will get the profits based on their amount they invested. The calculation of your profit is based on the percentage of the returns on your investment.

Who collects that money ?

The mutual funds/investment houses are known as asset management companies (AMC). The investment houses are not financial institutions. They collect money from investors and invest it across various assets. Both RBI and SEBI regulate the mutual fund industry. We have seen that the SEBI is the primary regulator of the securities market, SEBI deals with the mutual fund schemes directly.

The mutual funds offered by the banks are under the partial control of the RBI. Otherwise, the RBI is not a regulator of MFs or the stock market.

The asset management companies, as the name suggests, manage the assets of the investors. Assets can be money, a capital asset like real estate, a car, a house, a machine, etc. These companies manage investor’s assets and aim to generate profit out of those assets by investing operations or by renting the assets.

Mutual fund ⇾ Collective growth — Mutual fund ⇾ **Collective growth**

Functions of a mutual fund house –

An AMC does many things simultaneously for the investors. A mutual fund is a financial instrument by which many people invest in multiple assets through these AMCs. The collection of funds is the core function of an AMC. Following are the functions of an asset management company –

1. Pooling of money from the investors, so that the fund becomes substantially big to invest in assets which can generate considerable profits / returns.

2. The fund house hires the fund managers. These managers are experts in the field of investment and management. These experts with the help of their knowledge regarding the markets, economy, global scenarios, etc. make an investment strategy which in future will generate decent returns for the investors.

3. Research is the base of all the investment strategies being finalized in the market. The AMCs do a lot of research and analysis before investing that pooled money.

4. AMCs do a lot of work regarding the selection of the assets that are safe with moderate to low risk. Stock markets are volatile and may be risky. We can take a risk as an individual investor but, choosing a good company to invest the pooled money is totally a different ball game.

5. Risk management is the key to safeguard the investor’s money in a situation of crisis. When our investment does not go as we planned, then we need to take some steps to tackle such failures professionally. AMCs have their expert fund managers to handle such volatility.

Pros and Cons of mutual funds

Pros – ✅

Most of the investors do not have a proper knowledge & guidance about the investment in the stock market, bond, etc. The stock market, especially, is very unpredictable compared to the gold market or any other market. People may get very low return in the market because of lack of the knowledge and awareness about the stock market.
- The mutual fund is the best way to invest money in the stock market for the investors who are not interested in the research and analysis stuff.
- AMCs take care of it and give us the best possible returns. We do not need to dedicate our time to stock market research, the fund house does it for us.

The mutual fund schemes are a better investment option than the bank FDs and many other savings schemes available.
- The mutual funds usually give more returns than average bank savings schemes, like FDs.
- In the long term, the MFs are far better options.
- When we invest in a MF, we actually invest in our Indian businesses and indirectly became the contributor to the growth of such businesses.

Mutual funds provide liquidity to the investors. One can easily withdraw their invested money by just selling the MF units. Usually, there is no restriction of a fixed time to withdraw your invested money.
- There is an ‘exit load’ if withdrawn before a predetermined time period. It is like a little fee for early exit.
- There is no maturity period in most of the MFs. One can keep investing as long as they like and can withdraw a part of the whole invested amount by selling a few units.

Flexible options for investment as per your needs –
- you can invest a lump sum amount, say 10 lakh rupees, at once, or you can invest Rs.500 every month.
- It is not compulsory to invest a certain amount every month. One can stop investing at any point in time and can restart investing at any time.

Cons – ❎

MFs are a bit risky because most of the MFs invest in the stock market, and there are times when markets do not generate the desired returns. The risk, mostly, is in the short-term investment, meaning, you invest only for less than a year.
- In the long-term, investment in MFs is safe, and investing is by default a long-term process.
- Long-term investment = investment time period is 1 year or more.
- Suggestion – One should consider at least a 7-year period for the investment purpose.

If we do not consider the market volatility in the short-term, then there is very low risk regarding the MF investment. The AMCs have the best of the experts to handle such large funds. These experts know where to invest and when to invest more than us. So, one can consider investing through MFs as they provide us the opportunity to invest in the best available options without us doing any research. They do it on behalf of us 😊

Read more about MFs on ➡️ mutual fund sahi hai

‘Mutual funds sahi hai’ is an educational initiative of the Association of Mutual Funds in India (AMFI). It is a platform to make people aware about MFs.

What is a mutual fund ?