What is a Mutual Fund

Mutual Fund

Before writing on this topic I can say only one thing that is " Mutual Fund is the best tool for you to invest your money into the stocks if you have no exposure of market and its related issues and additionally you don't want to take any risk"

            Whenever we as a commoner hear the name Stocks from any person suggesting us to explore for making money then the first thought that comes in our mind is.. just avoid it, but why is my question for you? What people generally make a mistake by thinking that Mutual Funds is as an option to invest only in Equity and whereas it is not like that. For maximum people Equity means stock market and to be precise it is individual stock picking and due to past scams, people generally tend to avoid investing in equity and so for a mutual fund. That's Why Industry for Mutual fund grown in the country after a delay. So people must be well versed with the term before going to invest in mutual funds.

             So let's start it with simple and logical things like this: if you want to invest in the stock market then you have two options with you, one is either you can do it by own or secondly you can hire somebody who will do on behalf of you what is called as a Fund Manager. To invest on your own in the market, you should have enough time, expertise to know each move of a market and also leisure to work with a handful of stocks you gonna pick up. Else you can go for the second option which is to choose somebody who is well qualified and trained to manage the stocks for you on your behalf. If you have chosen the second option than that simply means you are choosing a mutual fund. But to choose such expertise it will cost you much and it is not actually affordable for most people, but many people can together hire the same and the same is being done in mutual fund scenario.

Basics of Mutual Funds as How it Operates:

          A mutual fund is a way in which a large number of people who are willing to contribute small amounts comes together and the amount so collected collectively will be handed over to the Fund Manager to manage it and build portfolio accordingly and generate returns for you. Fund Manager is the person who makes decisions regarding buying and selling on your behalf after his thorough research.

           The mutual fund industry in India is mainly subdivided into three parts. First of all, the organization or firm which is planning to start a mutual fund house is known as sponsors and SEBI had laid down some rules clearly about the firms who want to be a sponsor and what all are the prerequisites they must abide by. Sponsors make an investment in setting up MF house to get some returns in terms of profit so the firm will set up a trust which is known as Asset Management Company (AMC). Further, this trust will appoint a trustee which will act as a custodian to the money pooled by various investors in the mutual fund house. AMC is nothing but a tool to provide service to the trustee in lieu of fees termed as AMC fees. Any scheme or plan which AMC wants to launch in the market must be approved prior to the Trustee.

          So by this one thing, you must have cleared in your mind that your money is safe when in mutual fund and it is not possible for AMC to run away with your money. As AMC is a trust and as per rules fixed by the government no trust can run away with the money of investors and if it does so, then, in that case, personal property of trustee is attached with and can be sold and also trustee can be jailed. Also, your money is also safe from being stolen.

     But one thing you must keep in mind that your investments are not safe from fluctuations of markets called volatility. The market keeps on swinging up and down and so your investment, but for this only diversification of stocks comes into place to pacify the market volatility.

As in Mutual Fund money is pooled by a large number of small customers and collectively invested into stocks or Bonds, so the return generated will also be distributed among all the investors based on the proportion of investment. Why we should go for Mutual Fund and not for Direct stock picking? .. and the answer is quite simple for it, as 

⇒First, we don't have any expertise with us to tackle market fluctuation or the timing of the market. 

⇒Second, we do not have enough amount to go for direct stock picking so better go with a small amount. 

⇒Third, we do not know how to manage our investment to produce inflation-beating returns for us.

Investment by Mutual Funds

Total 3 types of assets you can buy using a mutual fund that is Equity, Bonds and Gold. To date Real estate is not available to be purchased via this mode of investment but maybe soon in the near future, you will be able to invest in real estate via special mutual funds called real estate investment trusts (REITs). Equity mutual funds buy into the stock of listed companies, whereas debt mutual funds buy debt papers issued by government and firms. And Gold funds buy an actual Gold.

Small guidance for you to help in choosing the right Asset

Large-cap funds are those which have a corpus of more than 10,000 crores, while Mid Cap firms have a corpus between 2500 to 10,000 crore. Small-Cap firms have a corpus of less than 2500 crore. Large-cap funds have slow but steady inflation-beating returns, whereas MID-cap funds have good exposure of the market already so bit stabilized. Mid-cap funds have greater returns and risk as well as compared to large-cap funds. Small-cap funds are new to the market so they are having the highest returns as well the highest risks associated with them. In market low time, small-cap funds generally get more losses and are the ones who are prone to failure. So, in market low time, the asset belonging to Small-cap funds is generally merged with mid or large-cap funds by Fund Manager if the particular fund does not perform well.
SEBI defines large-cap as one that features within the first 100 companies by market capitalization on the stock market, Midcap from No. 101 to 250 and Small Cap 251 and below. But in general one other definition is being followed for Companies to be categorized as Large-cap which has its Market Capitalization of more than 10,000 Crore, Mid Cap companies have their Market Capitalization from 2500 to 10,000 Crore. While Small-Cap companies have their Market Capitalization below 2500 Crore.