A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
How are mutual funds different from portfolio management schemes?
While both mutual funds and portfolio management services (PMS) allow investors to invest in stocks and bonds by investing their money in a joint investment vehicle managed by professional fund managers, both are two different investment options that serve different goals and are meant for two different types of investors.
Anyone can invest in a mutual fund with a minimum of INR 500/-p.m., but PMS schemes require a minimum investment amount of INR 25 lakh as they are mainly asset management products targeted at HNIs. Mutual funds are heavily regulated by SEBI while PMS schemes do not have strict disclosure rules. In addition, PMS products are designed for advanced investors who can understand the risks involved as PMS funds can invest in securities that may not be easily tradable in the market. Mutual funds invest in liquid securities. Mutual funds are less risky than PMS schemes due to their well-diversified portfolio. PMS funds usually have a concentrated portfolio of 20-30 stocks. Therefore, the performance of the fund is completely dependent on the fund’s ability to withdraw stocks.
LDCs have a high entry and exit load, apart from a high fund management fee. Mutual funds do not have an entry load and may have a small exit load. Mutual funds are suitable for retail investors, while LDCs are not intended for retail investors.