What is a mutual fund?

You would wonder why anyone would care for a primer on mutual funds when every investor in the country knows that 'Mutual Funds Sahi Hai'. True, a lot of investors have found the virtues of investing through mutual funds in the last few years. Most of them have been investing in mutual funds regularly, irrespective of the ups and downs in the market. However, the industry always attracts new investors who are not very sure about the basics of mutual funds. If you are one of the new entrants, this article is for you.

For the uninitiated, mutual funds are an investment vehicle you can use to invest in bonds, stocks (Indian as well as foreign), and commodities like gold. Mutual funds collect money from individuals, pool it together and invest the money on behalf of them in specified instruments.

As said earlier, the investments can be in a specified instrument. For example, an equity scheme would invest in stocks. A debt fund would invest in bonds, a gold fund in gold. There are also hybrid funds that can invest in a combination of equity and bond, sometimes even gold. A mutual fund scheme can also invest in a specified theme or sector; there are also schemes that invest in foreging stocks.

Then what is the confusion? Sometimes investors use mutual funds to speak about a fund house. For example, it is very common for investors to say that I have invested in SBI Mutual Fund. In fact, many investors opt for fund houes sponsored by banks, without bothering to find out the details about the scheme. So, they invest in HDFC, ICICI, Axis, SBI etc.

There is another set of investors who invest in Systematic Investment Plan (SIP). What they want to say is they are investing through SIPs in a specific scheme. However, they are so caught up with the sales pitch of the invincibility of SIP, they completely ignore the details of the scheme.

New investors should remember to keep in mind the fact that one is always investing in a mutual fund scheme. Sure, the reputation and stability of the fund house matters, but that alone cannot be the criteria to invest in mutual funds. Always choose a mutual fund scheme that matches your financial goal, investment horizon, and risk profile. This is the easiest way to ensure that you are choosing the right scheme for you.

For example, if you are conservative investor looking to park money for a few days or weeks, you should choose a debt mutual fund like liquid funds. If you are an aggressive investor looking to achieve a long-term financial goal that is at least 20 years away, you should invest in equity mutual funds..

Finally, what is the biggest advantage of investing in mutual funds. One, they allow you to invest a small amount - as little as RS 500. Two, you will get the services of a fund manager for a small fee. That means, you do not have to worry about managing your investments, a professional fund manager would take care of it for a small fee.