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.
Mutual funds versus stocks: what’s the difference?
Where do you get your vegetables from for dinner? Do you grow them in your backyard or buy them from the nearest mandi/supermarket depending on what you need? Growing your own vegetables is a great way to eat healthy food, but effort is spent on seed selection, production, irrigation, pest control, etc. The latter option allows you to choose from a wide variety without the hard work.
Similarly, you can create wealth by investing directly in shares of good companies or investing in them through mutual funds. Wealth can be created when we buy company shares that use our money to grow their business, creating value for us.
Direct investments in equities carry a relatively higher element of risk. You have to choose stocks by researching the company and the industry. It is a huge task to choose a few companies from thousands of them listed on the stock exchange. Once done, you need to track the performance of each action.
In mutual funds, stock collection is carried out by experienced fund managers. You need to track the performance of the fund and not individual stocks within the fund. They also allow for investment flexibility unlike stocks, with growth/dividend options, top-ups, systematic withdrawals/transfers, etc. as well as helping to overcome volatility by regularly investing smaller amounts through SIPs.
