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 company in the UK.
Why investing is better than saving?
Imagine a 50-overs cricket match where batsman #6 only enters to beat in the 5th over. His job is to first make sure he doesn’t lose the wicket and then focus on scoring.
While saving is a must to invest, it is important to save your wicket in order to score later. You can save the wicket by playing defensive cricket and avoiding all sorts of shots. But this would result in a very low score. He would need to cross certain boundaries by taking certain risks such as shots or drives between fielders or cuts and shots.
Similarly, to
accumulate large sums to achieve your financial goals, to beat inflation, you have to take certain investment risks. Investing is all about taking calculated risks and managing them, not avoiding risks entirely.
At the same time, in the analogy of cricket, to stay in the fold and points, you have to take calculated risks and not play rash shots. Taking unnecessary risks is a bad strategy.
So while saving is necessary, investing is very important to achieve long-term goals.