Share Market

A mutual fund can be looked at as a cooperative of investors. A number of people pool their investment money together to purchase stocks, bonds, securities of other investments. This fund is then managed by a fund manager who will be an expert in this area.

By pooling money, an individual investor can invest in companies and projects that may otherwise be too expensive to be involved with. Also investor, in the initial phases, does not have the time and expertise to analyze and invest in stocks and bonds. Mutual funds offer a viable investment alternative. A team of professional fund managers manages these funds with in-depth research inputs from investment analysts. Also being institutions with good bargaining power in markets, mutual funds have access to decisive corporate information which individual investors cannot access. Therefore, they are often an ideal starting point for a new investor.

The ability to invest in a number of companies is called diversification and helps to reduce the risk to an investor. Financial theory states that an investor can lessen his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a range of assets, this risk is substantially reduced. As might be imagined, this ability to diversify with very small sums of money and by paying very low fees makes mutual funds perfect for investors with restricted time, experience or money.

A Mutual Fund is a trust registered with the Securities and Exchange Board of India (SEBI), which pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. This pooled income is professionally managed on behalf of the unit-holders, and each investor holds a proportion of the portfolio i.e. entitled not only to profits when the securities are sold, but also subject to any losses in value as well.

Also there are some disadvantages of Mutual Funds like their high costs, possible tax consequences and over diversification. So, it is very important for one to understand the basics and then shop!