Building wealth with mutual funds

Introduction:

Investing can be defined as the application of money or the value of money in a process that generates more money. That is, 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 investment avenues, each with a different purpose and corresponding end result. You can invest in raw materials such as wheat, soybeans, corn, etc. You can invest in company stocks. Or you can invest in Mutual Funds (MF).

Definition of Mutual Fund (MF):

What is an MF? A mutual fund is a joint effort in creating wealth. In practice, a group of people come together and invest in a particular value / values ​​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.

So it stands to reason that when a diverse group of people with different educational, cultural, economic and other backgrounds come together, there must 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 an Investment Fund (MF) depends on the laws in force in the country of its establishment. For example, in the United States, FMs enjoy a special legal status. In India, they can be established as asset management companies, and the trustees take care of the day to day. These trustees are competent individuals who have a deep knowledge and understanding of the markets.

What MF 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 available to them officially.

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 to its members during the term of the scheme. Consequently, the MF chooses the type of companies to invest in, resulting in regular inflows of returns that are distributed among members according to the terms of the MF. this kind of beneficial MF.

Growth funds:

As the name suggests, MF’s emphasis here is growth. To achieve this goal, MF invests in companies that are likely to grow rapidly 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 are willing to expect a decent appreciation of their investments, without requiring regular income, may choose to invest in this type of fund. .

Fiscal Savings Fund:

Aside from 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 rationale behind such a fund is “One dollar saved is one dollar earned.”

Typically, these tax savings funds are operated under the auspices of some government tax concession regime. That is, by investing in this type of fund, the investor is released from his tax liability to a certain extent. 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 an MF is that several heads come together and exercise their minds for mutual benefit. Some of the benefits that MF members get are:

Capital benefits:

Suppose 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 entity, then their investment of USD: 100,000.00 would each earn the benefits of one USD: Investment of 100,000.00, instead of USD: 1,000.00 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 can have an idea of ​​how to invest and what to do with their money. However, to maximize profitability and fully enjoy the benefits of investing, it is necessary to have a professional knowledge of the different investment vehicles and also a deep knowledge of the market and its operation.

This is where the expertise available with an MF comes to the fore. MFs are managed by professionals who know their work. By investing in an MF, the investor is capitalizing on the Fund Manager’s expertise and reaping the benefits of their investment.

Diversification benefits:

An individual investor may not be in a position to invest in a lot of diverse industries due to limited resources. However, by investing in an MF, you get the benefit of investing in a representative sample of activities and industries. By doing so, the investor, on the one hand, benefits from the rebound of any sector of the MF portfolio and, on the other, is not adversely affected to a great extent, due to the spread of their funds in 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, as, subject to certain restrictions, a member of the MF can collect their share of the investment, if necessary. In addition, the investor does not need to liquidate his entire stake, but to sell only tradable lots, as specified, and retain the rest of his portfolio.

Conclusion:

MFs, as investment vehicles, have proven to be versatile, catering to 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 who cannot devote the time and effort required to do thorough research before investing.

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