Mutual funds sahi hai!

When you are new to investing and do not have the appetite to play the stock market, a word of advice you often hear is to invest in Mutual Funds. Now what are these and how are they different from stock market investments? Let us try and understand.

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A mutual fund is basically like an investment pool, where small amounts of investments from various people are gathered and then they are collectively invested in either shares or debentures and other securities to give maximum gains to the investors. Mutual funds are usually managed by a fund manager, which could be an organisation or an individual.

In India, the beginning of Mutual Funds can be traced back to the establishment of Unit Trust of India in 1963. By the late 80’s PSU Banks, LIC of India and GIC set up their mutual funds. The establishment of market regulator SEBI in 1992 paved the way for the beginning of private mutual funds in India. These private entities entered the market in 1993 and the SEBI came up with comprehensive regulations for mutual funds in 1996, which are applicable till date. In India, mutual funds are set up under the Indian Trusts Act.

Advantages of investing in Mutual Funds

Mutual funds offer a multitude of advantages for its investors, some of which are listed below:

1. Professionally managed – If you invest in stocks and shares, you have to keep track of every change in the market and you have to be very alert to any risk to your investments. It is not possible for everyone to keep such a keen eye on the markets while balancing their job and other commitments. In the case of a mutual fund, this job is done by a professional which reduces your anxiety and also helps in maximising your gains.

2. Risk diversification – The amount invested in mutual funds is invested by the fund manager in diverse vehicles like stocks, debentures, securities etc. Thus the risk of losing the entire investment if one of them goes bust is highly reduced.