Mutual Fund

Suppose you are an investor and want to invest some money but don't have enough to invest in more than one place, for example, you have only ₹500 so with this you can buy shares of any one company only (whose share value is less than ₹500) but if in future there is a fall in share value of company than unfortunately, you have to face  loss. 

But what if you can invest those ₹500 in the different company of different sector like food, technology, clothes, etc.. Well that's what a mutual fund does for you. Mutual fund manager/company collects money from many retail or small investors and invest total collected money in different sectors so that if anyone sector face loss it could be cover from another sector in profit and save the investor from a loss. In fact, a mutual fund is itself a type of investment because it is professionally managed investment fund made up of a pool of money collected from retail investors to invest total collected money in buying securities such as bonds, equities, money market instrument and other assets.

Each investor owns units or shares, which represent a portion of the holdings of funds. The income generated from this investment is distributed among the investors in proportion to their holdings of funds after deducting certain charges and expenses.

Investing in a mutual fund is the easiest way to grow your wealth. This is why the Fund manager's expertise is an important factor to consider. The success of a mutual fund largely depends on the ability of fund manager in making decisions regarding where to invest and when to start or close the trade, etc.. All mutual funds are registered with Securities Exchange Board of India (SEBI) and therefore, is quite safe.

The mutual fund has advantages and disadvantages compared to direct investing in individual securities.

ADVANTAGES

1. Diversification- The reduced risk is achieved through the use of diversification, as most mutual funds will invest in anywhere from 50 to 200 different securities. In a mutual fund, diversification helps to cover loss by one sector with gains from another sector.

2. Low cost- Mutual funds are bought and sold in large amount (in terms of securities) so their cost of the transaction is very low as compared to other individual security transactions.

3. Low investment needed- Any person can start investing in a mutual fund with a very low amount that is with ₹500 which is very difficult to start with individual securities.

4. Professional portfolio management- The biggest advantage of a mutual fund is that your funds are managed by professionals who are experts in this field and it is helpful for those don't have time and knowledge of managing funds and in return, you have to pay fees to them which is very low.

5. Safety- Mutual funds are regulated by the government body that is Securities Exchange Board of India (SEBI).

DISADVANTAGES

1. Less control- You will have less control over your funds and cannot take actions if/whenever you recognize the gain opportunity.

2. Unknown income- You cannot predict in advance what will be your income from investing in a mutual fund. only an idea or estimation about income can be made.

3. Fees - You have to pay fees to your fund manager which most of the time is fixed. If profits are low then paying fees to fund manager may sometimes make the investor feel not reinvest in a mutual fund.

4. Taxes- When selling of securities takes place that is when a fund manager sells securities and capital gain is incurred then the tax liability arises which has to paid to the government. However, there are much tax exempted or tax saving schemes/ options are also available.

TYPES OF MUTUAL FUND

There are mainly three types of mutual funds:- Open-end fund, Unit investment trust, Closed-end fund. Exchange-traded funds (ETFs) are open-end fund or unit investment trust that are traded on exchanges. a mutual fund is classified in different categories according to their investment and risk involved like

1. Diversified Fund- This fund invests in companies spread across sectors. If one sector does not do well than another sector would save the fund.
2. Index fund- This fund clone the portfolio of a particular benchmark index like Sensex. The valuer of the fund varies in proportion to the benchmark index. 
3. Tax Saver Fund- It offers tax benefits to investors under the Income Tax Act.
4. Sector Fund- This fund invests mainly in equity shares of companies in a particular business industry.
5. Debt Fund- This fund invests in money instruments like bonds, debentures, government securities and commercial papers. The fund aims to provide a regular income to the investor. It is also called Income Fund.
6. Equity Fund- This fund invests a major part in equity shares. Since the return are directly linked to the performance of the stock market, it carries a comparatively higher risk.
7. Hedge Fund- It is a high risk fund that follows highly speculative trading strategies.
8. Gilt Fund- This fund invests in bonds and securities issued by state or central government to ensure safety of principal amount and returns.
9. Balanced Fund- This fund invests in both equity shares and fixed- income bearing instruments in some proportion. The idea is to provide the safety and steadiness of the debt market while capitalising on the high returns earned from the equity markets.
10. Liquid Fund- It is also called Money Market Fund. it aims at providing easy liquidity, safety of capital, and decent returns. This fund invests in highly liquid short term instruments like treasury bills and commercial papers. 

HOW MUTUAL FUND WORKS

A mutual fund is an investment and a company also. Just like an investor invests in shares of company eg. Infosys Ltd. he is buying a part of the ownership of a company, similarly, a mutual fund investor buys part ownership of the company and its assets. The difference is that Infosys is an IT company and mutual fund company is engaged in the business of investment. 

        The fund manager is hired by the board of directors and is legally bound to work in the best interest of an investor. Most fund managers are also the owners of funds. The fund manager may employ some analyst to perform market research and help to pick the best investment options. It needs to have a lawyer and compliance officer to keep up with government regulations.

EARNINGS FROM MUTUAL FUND

1. Income is earned from interest on bonds and dividend on stock or equities. Fund manager distributes income from funds to investors at the end of the year.

2. If a fund manager sells securities at a higher price then the capital gain is incurred. Fund manager distributes these capital gains to fund owner/ investors. However, these gains can also be reinvested.

3. If the price of fund holdings increases but the funds have not been sold by the fund manager, you can sell your mutual fund shares for a profit.