Mutual funds are institutions that mobilise the savings of investors and invest them in a portfolio of securities like shares, bonds, debentures, money market instruments etc.
Is it possible for you to promote and build a great company like Infosys or Bharti Airtel?
A vast majority of readers will answer in the negative. Great companies are founded by visionary entrepreneurs. These visionaries, like geniuses from other walks of life, are very rare. They create jobs for people, contribute to economic growth and create incredible wealth for investors.
A great merit of the capital market is that it enables ordinary investors to participate in the sharing of this wealth. Thus, while a few extraordinary entrepreneurs create wealth, a large number of ordinary investors participate in the sharing of that wealth. However, direct investment in the stock market requires some expertise. Most people do not have this expertise or the time for direct investment in the stock market. For them, it would be sensible to entrust their funds with experts who invest their money in good securities. This is the essence of mutual fund investment.
Mutual funds are institutions that mobilise the savings of investors and invest them in a portfolio of securities like shares, bonds, debentures, money market instruments etc.
The securities are selected to suit the investment goals of investors. Investment goals of investors differ due to differences in age, income, family commitments, life style etc. There are different types of funds to suit the different investment goals of investors.
Based on investment objectives, mutual fund schemes can be broadly classified into five: Growth , income, balanced, liquid and tax-saving.
Growth schemes invest major part of their funds in equity shares. Such funds mainly seek to give long term capital appreciation to investors. This would be an ideal investment option for young investors.
Income schemes aim at giving regular income to investors. Therefore, bulk of the funds are invested in fixed income securities like bonds, debentures etc. Income schemes are ideal for retired people.
Balanced schemes balance the growth and income objectives. Therefore, they invest both in shares and fixed income securities. This scheme is suitable for investors who look for moderate growth and income.
Liquid schemes invest in short term instruments like treasury bills, call money, commercial paper etc. These schemes mainly aim at providing liquidity to investors. Investors in these schemes are normally corporates and individuals looking to park their short term surplus funds.
ELSS (Equity Linked Savings Schemes) offer tax savings to investors. They are ideal for those looking for tax savings.
Mutual funds are eminently suitable for small investors. Investors can start with small amounts, say Rs 1,000. They get the advantage of expert fund management apart from liquidity and tax advantages.
The writer is investment strategist, Geojit BNP Paribas
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