MUTUAL FUNDS - A NOVEL INVESTMENT OPTION

MUTUAL FUNDS - A NOVEL INVESTMENT OPTION

Savings represent income earned but not spent. The most common form of saving is putting money aside in a bank. Banks pay a fixed rate of interest depending on the tenure of the deposit. Banks, in turn, lend these savings at a higher interest rate to borrowers to facilitate trade, commerce and economic activity. The credit risk is borne by the bank and the depositor unless a bank goes bankrupt. A bank effectively connects savers and borrowers.
        The concept of banking originated in the 14th century, more than 500 years ago. With banking having been established as a concept for more than 500 years and banks being more vigilant, very tightly regulated bank deposits have been viewed as the safest among various investment options.

Mutual Funds are another method of saving and investing money. Here also savings of different investors are collected and pooled together for buying securities to earn a return for the investors. Unlike a fixed return offered by bank on its deposits, in case of Mutual Funds, the investor earns the return which accrues on the securities purchased and therefore no fixed returns are promised. In other words Mutual Funds are nothing but collective investment schemes. Instead of an individual investing on his own, savings of a group of investors are pooled and then invested on their behalf.

Pooling of assets enables investing to be done in a professional manner with the Mutual Fund hiring qualified personnel to invest the money in a scientific and disciplined manner.

Some of the advantages of investing in Mutual Funds are:

Professional Management

For an average investor, it is a difficult task to decide what securities to buy, how much to buy and when to sell. By buying a mutual fund, the investor acquires a professional fund manager who decides what to buy, when to buy and when to sell it. The fund manager takes these decisions after doing adequate research on the economy, industries and companies, before buying stocks or bonds.

Diversification

Any prudent investor needs to diversify his investments across several different securities. Diversification helps in reducing risk substantially. With a common pool of money a mutual fund is able to diversity more easily across sectors and companies in a manner that an ordinary investor may not be able to do. Imagine an investor with Rs 5,000 wanting to invest in 30 companies' stocks listed on the Bombay Stock Exchange. It is just not possible for him to create a diversified portfolio, but he can invest in Mutual Funds comprising of these 30 companies.

Liquidity

Unlike several other forms of savings like the Public Provident Fund or the National Savings Scheme, an
investor can withdraw his money from a Mutual Fund on immediate basis. Mutual Funds investments are more liquid than most investments in shares, deposits and bonds. In most funds the investor can redeem all or part of his investment any time he wishes. In some schemes a small fee called an exit load is to be paid for an early exit.

Investments in Small Amounts Possible

Almost everyone can buy Mutual Funds. Even a sum of Rs.500 or 1,000 can be invested in a Mutual Fund. The smallest investor can get started by saving as less as Rs.I00/- per month in a Systematic Investment Plan.

Wide Choice of Products

Depending on the investor's need and time horizon Mutual Funds offer a wide range of products which can cater to overnight liquidity requirement, cash flow management or long term retirement planning.

Reasonable Costs

Mutual fund companies charge a fee for providing all these services. As the Funds generally buy and sell

Securities in large volumes, the investors benefit from lower trading costs, transaction costs, commissions and
therefore the effective cost to investor is not high. Ceilings on the expenses that can be charged are prescribed by the regulator.

While Mutual funds originated in the 181h century they have become very popular in the last 50 years and have become the ideal vehicle for channelizing household savings.