What are Mutual Funds?
When we search for different investment types, we always see mutual funds as the best option or as the first option. But what do you mean by the mutual fund?
Mutual funds are investment instruments where the money collected from investors like you and me is invested in different asset classes like equity, gold, bonds, cash, money market, etc. Here the funds are managed by financial analysts called Fund Managers, who regularly watched the market and make necessary changes to the proportion in which our money is allocated to different assets.
For example, fund ABC invests in stocks A, B, and C in the proportion 40%,40%,20%. Based on the past performance and future profitability potential, fund managers can change the percentage allocation to different stocks like 35%, 35%, and 30%, respectively.
So the performance of a fund is purely based on the performance of underlying assets. One should diversify their portfolio to reduce the risk they might face on a major market crash.
Advantages of mutual funds
Mutual funds are always the favorite instrument when it comes to retail investors. There are many reasons for that. We will go through some of them.
• Diversification
One of the main advantages of Mutual Funds is the diversification of portfolios. Mutual funds invest money in companies of different sectors and other instruments as well. This helps you reduce the risk with greater return in the worst situations.
For example, during the COVID-19 market tanked up to 50% from its all-time high. But mutual funds tanked like 20% - 30%, thereby reducing the risk of your investment.
• Ease of buying and selling
Mutual funds can be bought and sold with ease now. Different apps help you invest your money with zero commission and show past performance details with CAGR returns and companies in which that particular fund is investing.
• All in One Investment
Mutual funds can be used as an investment instrument if you want to invest in, let's say, NIFTY 50 companies, but you don't have enough capital. At the time of this post, one share of TCS cost Rs. 3075.80, and one share of WIPRO cost Rs. 409.05. But the NAV of Aditya Birla Sun Life Digital India Fund is Rs.101.8500, where NAV is calculated based on TCS and Wipro values.
