Mutual Funds – the basics.

What is a mutual fund?
A mutual fund is a professionally managed investment fund that pools the money of several investors and makes investments on their behalf. Individual investors in the mutual fund own ’shares’ in the fund and receive a return in proportion to their investment.

Why should I invest in a mutual fund?
Investing in a mutual fund has the following advantages:

i) Professionally managed – Mutual funds are managed by professionals. Individual investors benefit from the high quality research and analysis that goes into their investment process.

ii) Well diversified – The large pool of funds provides the opportunity to make a wide array of investments. Mutual funds are very well diversify such that a loss in a particular investment will be offset by profits from other investments. The net return is thereby beneficial to the individual investor.

iii) SEBI regulated – Mutual funds are regulated by the SEBI. This protects the individual investor from ponzi schemes and other potential fraud.

iv) Liquid – Mutual funds are highly liquid and so the individual investor can convert their investment to cash with relative ease.

Is my money safe with a mutual fund?
Mutual funds are regulated by the SEBI and are under strict regulatory supervision. They are required to fully disclose the details of all investments and are overseen by a board of trustees that should comprise of more than two thirds of independent directors.

What are the disadvantages of investing in a mutual fund?

i) Additional Costs – Fund management adds an overhead to the investment process and this additional cost is borne by the individual investors in the form of management fees.

ii) Taxes – Investment decisions do not take into account the tax liabilities of individual investors. Hence it is often not possible to minimize tax liabilities on mutual fund investments.