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.
Won’t I need a large amount to invest in mutual funds?
People think mutual funds are elite investments made only for the rich. The fact is: you do not need a large sum to invest in mutual funds, you can start with a sum starting from 500 euros, or 5000 depending on the type of fund you choose.
Why keep minimum amounts as low as these?
Economies of scale can be easily understood if we look at air travel. The plane would cost a lot of money and, of course, not everyone owns a plane! However, we can afford to travel by air simply because all costs are divided between all passengers using the services at various different times.
Similarly, a person may not have enough money to
create a diversified portfolio through investments in a very large number of investment avenues, not have enough money needed to conduct or buy investment research. However, economies of scale allow small investors to obtain multiple benefits through mutual funds.
Mutual funds are therefore ideal vehicles for small investors to save and invest.
