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These days when you travel across the country,
especially in the big cities, one invariably comes across numerous
hoardings talking about mutual funds. The financial pages of the
newspapers are also filled with news of mutual funds very
regularly. What is a mutual fund after all? Is it any different
from the different choices one has? Are there any benefits of
investing in mutual funds? Well, this series of articles is an
attempt to get answers to some of these questions.
A mutual fund is one of the earliest of the BPOs. It is not an
alternative to various investment options available to an
investor. Let us explain this in details. But first of all, let us
understand the need of investing from an investor's point of view.
The word “investment” means different things to different people.
Some see it as a serious affair, for some it is one form of
entertainment, for some it is a risky business, for some it brings
the memories of some of the stock market crashes, for some it just
means buying Government sponsored schemes. Investment assumes a
much bigger role than what is mentioned above. It serves the
purpose of bridging the gap in our cash flows. Some of our cash
flows have certain patterns whereas some are random; some occur at
a regular short term intervals, some are one-off, still some occur
at regular long term intervals; some can be defined in terms of
time, for some it would not be possible. Most of us have a regular
monthly income some of the expenses are also monthly. The gap
between the two, hence, becomes our monthly savings. |
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Some
of the major expenses that we encounter in life cannot be funded
out of our regular monthly income. Hence, an individual has two
options:
1. Funded in the past through investments for an expense to
be incurred now
2. Funded through a loan, which is paid back over a period
of time in future Let us only restrict our discussion to
investments only. Let's say, there is a financial goal at a future
date. An investor can start accumulating for the goal from now on.
The regular savings are spread over a period of time whereas the
major goal may need to use all the accumulation at one instant. As
can be seen from the above diagram, the financial resources for
meeting the financial goal have come from two sources: profession
and investments One chooses the profession based on certain
parameters; viz., education, experience, skills, hobby or at times
inheritance. Some or most of these are not present when it comes
to investments. One spends around 10 to 12 hours of a normal day
towards profession, however, one does not get even 10 minutes to
spend on investments. Given this background, to manage the
investments, one may need the help of a professional which could
come in the form of mutual funds.
So what exactly is a mutual fund? A mutual fund is a service
offered by a professional organisation known as an asset
management company. This company launches schemes (also known as
products) by stating certain objectives clearly. An investor can
invest into these schemes if the objective of the scheme is in
line with the investor's needs. By investing in a mutual fund
scheme, the investor has outsourced the job of managing his money
with the asset management company. This company would then Invest
the investor's money in line with the stated objective, Handle all
the research required to select the underlying investments, Keep a
track of those investments, Make changes to the portfolio, if
required and Also handle the entire administrative job related to
the above. It will summarise the performance of the portfolio into
a statement and give it to the investor, who gets the complete
picture on that one page known as the account statement. Apart
from the research, security selection, portfolio management and
administrative services that the mutual fund provides, it also
offers a great benefit called diversification at a very low cost
through a small investment.
More about these benefits later. The author Mr. Amit Trivedi runs
Karmayog Knowledge Academy. The views expressed are his personal
opinions. He can be reached at
karmayog.knowledge@gmail.com
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