Building Wealth With Mutual Funds
BusinessIntroduction:
Investment can be defined as the application of money or the value of money in a process that generates more money. In other words, the multiplication in the amount of money, as a result of channeling it through a process that adds incremental value to the original amount.
There are many ways in which wealth can be created and multiplied. There are countless avenues of investment, each with a different purpose and corresponding bottom line. One can invest in gold or other precious metals like silver, platinum, etc. One can invest in commodities like wheat, soybeans, corn, etc. One can invest in shares of companies. Or you can invest in Mutual Funds (MF).
Definition of Mutual Fund (MF):
What is a MF? A mutual fund is a joint effort in creating wealth. In practice, a group of people come together and invest in a particular security/securities for the common good. This group of people is grouped institutionally in the form of a fund or an agency that deals with their investment problems.
It stands to reason, then, that when a diverse group of people with different educational, cultural, economic, and other backgrounds come together, there should be a common set of rules, customs, and practices to achieve harmony in their functioning, in order to achieve their common goal.
The legal constitution of a Mutual Fund (MF) depends on the laws in force in the country of its establishment. For example, in the United States, MFs enjoy a special legal status. In India, they may be set up as asset management companies, with trustees running the day-to-day business. These Trustees are competent individuals who have in-depth knowledge and understanding of the markets.
What MFs do:
MFs are in the business of collecting funds from members and investing them in various stocks, securities, bonds, etc. for the benefit of its members. MFs follow different strategies depending on their investment philosophy and the investment channels officially available to them.
Types of funds:
There are basically two types of funds, namely growth funds and income funds. Apart from these there is also the Fiscal Savings Fund.
Income Fund:
A fund whose objective is to ensure a regular income for its members during the term of the regime. As a result, the MF chooses the type of companies to invest in, which generates regular inflows of returns that are distributed among members according to the MF’s terms.
Growth Funds:
As the name implies, the MF’s emphasis here is growth. To achieve this goal, the MF invests in companies that are likely to experience rapid growth in a relatively short period of time. As a consequence, the risk factor associated with this fund is also high. Investors who are not risk averse and willing to wait for a decent appreciation of their investments, without requiring regular income, may choose to invest in this type of fund. .
Fiscal Savings Fund:
In addition to the two types of funds discussed above, there is another type of fund offered by an MF with benefits in the form of tax savings, rather than income and growth. The logic behind such a fund is “A dollar saved is a dollar earned.”
Normally, these fiscal savings funds are operated under the auspices of some government regime of fiscal concessions. In other words, by investing in this type of fund, the investor is released to a certain extent from his tax obligation. Investors whose primary concern is reducing their tax liability will find this fund attractive.
Benefits of Mutual Funds:
Two heads are better than one! What happens in a MF is that several heads come together and exercise their minds for mutual benefit. Some of the benefits that increase for the members of an MF are:
Capital Benefits:
Assuming that there are 100 investors who want to invest USD: 1000.00 each in a particular activity. If they were to invest individually, each would do so up to their own limit, and each would benefit to the limited extent of their investment. : 100,000.00 investment, instead of USD: 1000.00 one.
In the same way, an MF makes it possible for its members to invest in stocks and securities that would be out of their reach as individual investors. Large-scale investments are made available to small investors by dividing the large investment into smaller parts or shares.
Benefits of the experience:
A lay investor may have an idea of investing and what to do with your money. However, in order to maximize returns and fully enjoy the benefits of investing, it is necessary to have a professional knowledge of the various investment vehicles, as well as a thorough understanding of the market and its operation.
This is where the experience available with an MF comes to the fore. MFs are managed by professionals who know their job. By investing in an MF, the investor is capitalizing on the experience of the fund manager and reaping the benefits of his investment.
Benefits of diversification:
An investor, in his individual capacity, may not be in a position to invest in a lot of diverse sectors, due to his limited resources. However, by investing in an MF, he gets the benefit of investing in a cross section of activities and industries. By doing so, the investor, on the one hand, benefits from the rally in any sector of the MF portfolio and, on the other hand, is largely unaffected due to the dispersion of his funds across a variety of sectors.
Other benefits:
Some of the other benefits of participating in an MF are the tax breaks available on certain funds. Apart from that, an MF offers liquidity, in the sense that, subject to certain restrictions, a member of the MF can cash out his share of the investment, if necessary. In addition, the investor does not need to liquidate his entire holding, but rather sell only tradable lots, as specified, and keep the rest of his portfolio.
Conclusion:
MFs, as investment vehicles, have proven to be versatile, serving both small and large investors. They do not require the investor to be an investment expert to take advantage of them. In fact, they are intended for people who do not have in-depth knowledge of the markets or cannot put in the time and effort to do thorough research before investing.