In my previous post, I had written that I would write about calculating returns on Mutual Funds. However, I got comments asking for a basic guide to Mutual Funds, so I guess it would make more sense to talk about what Mutual Funds are, in greater detail, before I talked about calculating returns. I wrote a guide to Mutual Funds as part of my Rupee Rani column, and I wanted to consolidate them, initially, but changed my mind. An overdose of information is likely to cause more confusion than provide clarity. Instead, I have broken down my guide to short posts, which I hope will be more clear.
What Are Mutual Funds?
A Mutual Fund is a trust which pools the savings of a number of investors who share a common financial goal. The trust collects money from these investors, and the consolidated amount is invested in different types of securities by ‘fund managers’. The type of securities that these ‘fund managers’ choose depends on the scheme, and risk category of the Mutual Fund. The income earned by the Mutual Fund is then distributed back to its investors in the proportion of their investment.Everyone's asking you to invest in Mutual Funds, but WTF are they? Here's the answer - Click To Tweet
Let’s say you have four friends – Michelle, Madhavi, Kamala and Raji. All five of you are working women, and earn a decent income. However, your savings plans are restricted to simply, not spending. Now Raji’s aunt and uncle have a successful share trading business, and they make great money. The idea of investing in the stock market is something that has appealed to all of you, but who has the time and energy to follow the markets all day? One day Raji comes up with a plan. She asks you all to give a portion of your savings to her, and she will, in turn, consolidate these savings into one big amount and give the total amount to her aunt and uncle, who will invest in the stock market on her behalf. Raji will then distribute the profits based on the proportion of everyone’s contribution to the total pool.
Raji is the mutual fund with whom you’ve entrusted the money, Raji’s aunt and uncle are the fund managers who invest the money so collected, and the rest of you, are the unit holders/investors.
Why Should Give I My Money To Someone’s Aunt?
Mutual Funds are a smart option to save for the future. This is because they don’t require a heavy initial investment, which means you can start saving slowly, and in small amounts. You can increase the amount of savings as you go, but the low investment means that they’re the perfect savings tool for young, and old alike. If you’ve just started working, you should start looking at a Mutual Fund to build yourself a corpus of money in the future – retirement house in a hill station? Five Star European Holiday? Brand new house? The possibilities are endless!
Another reason why I’m a fan of Mutual Funds is because they will give you the expertise that you don’t have. Fund Managers, who make these investments, are professionals whose jobs are solely dedicated to following the markets and making the best decisions for their funds. That isn’t to say that every Fund Manager is a magical money unicorn, but rest assured that Mutual Funds do take away the guesswork and agony that comes with investing directly.
Additionally, Mutual Funds are transparent – any and all information about the Mutual Fund’s investments, and performance over the years are only a quick google search away, and they’re regulated by SEBI.
I’ve made an infographic below, which I hope makes things simpler:
I hope this post has been helpful in making you understand what Mutual Funds are. What other personal finance concepts would you like broken down? Taxes? Investments? Credit Cards? Do let me know in the comments.