Mutual Funds | rupeecapital

What is a Mutual Fund?

For many, mutual funds might seem complex or intimidating. Our goal is to simplify them at the most basic level.

At its core, a mutual fund is a pool of money collected from numerous investors who share a common investment objective. This fund is professionally managed and invested in equities, bonds, money market instruments, or other securities.

When you invest in a mutual fund, you receive units that represent your share of the fund’s holdings. Any income or gains generated from these investments are distributed proportionately among investors, after deducting expenses, through the calculation of the fund’s Net Asset Value (NAV).

In simple terms, mutual funds provide a convenient and cost-effective way for everyday investors to access a diversified, professionally managed portfolio, making them one of the most practical investment options available.

How Does a Mutual Fund Work?

A mutual fund pools money from multiple investors to purchase a diversified portfolio of securities as per Scheme Offer Documents. Let's break down how a mutual fund works.

The pooling of funds is done when investors contribute money to the mutual fund scheme in the form of units. Each unit represents a proportionate ownership in the fund, and its underlying assets. The objective of the fund would follow a specific investment strategy, and determine the kinds of securities the fund will invest in and it is subject to market risks.

Mutual fund schemes usually invest in a broad range of securities to diversify risks. The fund manager would actively manage the portfolio, make decisions on buying, holding or selling the underlying securities according to their research and analysis. Passive mutual funds mirror the performance of a market index to maximise returns. The portfolio of a passive fund replicates a designated market index, such as Nifty or Sensex, with the composition and proportion of investments matching the tracked index, subject to tracking error.

Features and Benefits of Mutual Funds

1. It is managed professionally: Mutual funds are managed by expert professionals who make informed investment decisions based on research.

2. Mutual funds are liquid in nature: Investors can buy or sell mutual fund units on any business day at the fund’s applicable net asset value (NAV).

3. Various Forms of Funds: There are different kinds of mutual funds to match different investment objectives and risk appetites, such as, Equity Schemes, Debt Schemes, Hybrid Schemes, Solution Oriented Schemes and other Schemes.

4. Systematic Investment Plan(SIP) : Mutual funds offer the option to automatically invest at regular intervals through the Systematic investment Planning mode. This gives investors the benefit of rupee cost averaging and the power of compounding in the long term.
(Other facilities like Systematic Withdrawal Plan, Systematic Transfer Plan are also available.)

5. Mutual funds offer diversification: By pooling resources, mutual funds provide investors with exposure to a diversified portfolio of securities. This lowers the impact of a single investments under performance.

6. It offers convenience: Mutual funds simplify the investment process of buying, selling, and management of the portfolio, which saves investors time and effort.

7. Mutual funds are affordable investments: Mutual funds enable small investors to access a diverse portfolio, even with limited capital.

8. Regulated environment: Mutual funds are subject to regulatory oversight from SEBI to protect investors and make sure that the investor's interests are secured.

9. Tax benefits: Some mutual funds are structured to provide tax benefits, which can benefit investors. For eg. ELSS Schemes, which provide tax benefits, subject to a lock in period.

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