What is a Mutual Fund? And can you profit from investing in mutual funds?
Mutual fund is a pool of money that individual investors provide to a fund manager to invest on their behalf. They are less stressful and the easiest way to invest in the market.
Let’s explain this through an example. John has ₹ 5000 to invest. He doesn’t have deep knowledge about stocks and doesn’t want to manage his own money. There are many people like John who want others to manage their money. They give all this money to a company who hires a fund manager to invest. A fund manager is a professional who invests based on the type of the fund. A mutual fund usually invests in a variety of stocks and bonds which helps in diversification and reduces risk exposure. Mutual fund also allows to use dollar cost averaging strategy.
What is dollar cost averaging?
Dollar cost average is a method of buying securities for a fixed amount on a regular schedule.There are mainly two types of funds. Open-ended and close-ended. Open-end funds are bought and sold at their net asset value (NAV). The net asset value is calculated based on the value of the fund’s underlying assets. Close-ended funds have fixed number of shares on an exchange. Like stocks, their price is determined by supply and demand
What are the benefits of investing in a mutual fund?
Well, you don’t have to do much work. Fund managers will actively monitor the stocks and bonds in a portfolio. They will also visit companies to make investment decisions. They spend a lot of time analyzing and interpreting how a company performs.
Why doesn’t everyone invest in a mutual fund then?
Well, there’s a catch. Every fund will charge a management fee called expense ratio for managing your money. High expense ratio will often eat up a large sum of your profits in the long run. Also when choosing a fund, one has to research about it in depth. There are quite a number of funds that didn’t give returns as expected.
So, for long-term capital gains and if you are a person who doesn’t want to manage your own money, Mutual Fund may be the best option for you to invest.