Mutual Funds Meaning, Benefits & Importance

Was this your first introduction to Mutual Funds? If yes, this was just one side of the range of opportunities that tag along with a mutual fund investment. When you thought of investing, the first thing that might have worried you is knowing different avenues in investing. Even though you are clear about the aim of investment and growing your wealth over time, you might have a question about the first safe step. Mutual funds are increasingly popular for the guard they provide to beginners trying to invest. But is a mutual fund only about safety? Let's understand.

What is a Mutual Fund?

Imagine being able to invest in hundreds of different stocks, hire a professional manager to manage your investments, and keep the costs associated with the assets at a bare minimum. You can do all of this with investment in mutual funds. That exemplifies mutual funds' power and significance for investors.

Asset Management Companies manage mutual funds money. They invest in stocks, bonds, other debt instruments, and a variety of different money market securities, depending on the objective of the mutual fund scheme. A fund manager is a person who is in charge of the entire management and monitoring of a mutual fund. The mutual fund charges a small fee for managing the money received from the investors for investing and managing the funds pooled by the investors.

Importance of Investing in Mutual Funds:

Mutual funds have several advantages that make them valuable. Let's take a look at the benefits of mutual funds, which are listed below-

i.  Convenient:

One of the most appealing features of mutual funds for investors is their convenience. Investing in mutual funds is a straightforward process. The entire procedure is paperless, and it can be completed from the convenience of your own home. And, once you've started your investment journey, you can use your computer or smartphone to keep track of your holdings and, if necessary, buy more units or sell your investment in whole or in parts.

ii.  Offers diversification:

Suppose you have one supplier of fruits in your restaurant. One day if that single supplier fails to turn up, your restaurant will be in trouble for the day. But if you made arrangements for supply with two or more suppliers, the chances of a breakdown in your business reduce considerably. That is what diversification does for your investment. Diversification lowers the risk of lowering an investor's risk even more. Because mutual funds are made up of various securities, investors' interests are protected if the value of some of the securities purchased by the mutual fund falls.

iii.  Provides liquidity:

A significant advantage of investing in a mutual fund is the ability to redeem units at any time. Mutual Funds, unlike Fixed Deposits, allow for flexible withdrawals. However, investors need to consider the exit load applicable, if any, and tax implications. Asset Management Companies (AMCs) charge investors when they exit or redeem their fund units, known as an exit load.

iv.  Range of choices:

Hundreds of mutual funds schemes are available from dozens of mutual fund companies for investors. With such a large selection, you have the freedom to choose mutual funds that meet your financial goals and risk tolerance.

v.  Managed by professionals:

Another important feature of mutual funds is providing professional money management expertise at a reasonable cost. An experienced fund manager manages your investment in a mutual fund with the assistance of a research team. The fund manager devises the asset allocation investment strategy. Then, according to the fund's investment objectives, the research team selects appropriate securities for investment.

vi.  Helps in tax saving:

Tax deductions of up to Rs.150000 per financial year are available for specific financial instruments under Section 80C of the Income Tax Act, 1961. Tax-saving mutual funds are one of the mentioned instruments. Due to the higher returns and the shortest lock-in period (3 years) of ELSS (Equity Linked Savings Scheme), it has become a popular tax-saving option among all Section 80C options for Indians in recent years.

vii.  Requires a low initial investment:

You can start building a diversified mutual fund portfolio by investing as little as Rs.500 or even 100 in mutual fund schemes of your choice through a systematic investment plan (SIP). A SIP can reduce the overall cost of investment and maximise the power of compounding for your investment.

Additional read: What is the Difference Between SIP and Lumpsum?

Investing through the right mutual fund plan regularly could help beat inflation and protect your capital. Money invested now will result in a safer tomorrow. You should plan your asset allocation based on your needs and risk tolerance. In return, you get expert management, cost-efficiency, a hassle-free process, and tax efficiency.

Alternate Read: Chapter 2 : Benefits of Mutual Funds

How does NAV work?

Imagine a basket holding all your mutual fund's investments. NAV is the basket's value after subtracting any fees. Divide that value by the number of fund shares, and voila! That's the price per share, which fluctuates based on the basket's contents. So, NAV reflects how your mutual fund is performing!

What is the Mutual Fund Net Asset Value Formula?

NAV stands for Net Asset Value, like the total worth of a mutual fund's holdings (stocks, cash) minus liabilities. Divide this by the number of funds shares outstanding, and you get the NAV - essentially the price per share!

How is NAV relevant to Investors?

• Price You Pay: NAV determines the price you pay to buy or sell fund shares. Essentially, you're buying a piece of the fund's holdings at their current value.

• Performance Tracker: Monitoring NAV fluctuations gives you a sense of the fund's performance. A rising NAV indicates the fund's holdings are increasing in value, while a falling NAV suggests the opposite.

• Comparison Tool (Limited): While NAV can help compare funds with similar investment styles within the same timeframe, a low NAV doesn't necessarily mean a bad fund. Consider the fund's overall strategy and long-term returns for a better picture.