Why Invest in Mutual Funds

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Mutual funds are essentially a gateway to the world of investing, and are simple instruments meant to help everyone get into the habit of investing and realise returns. 

Simply put, a Mutual fund is a pool of funds, taken together from different sources, to be managed by an Investment Manager, who knows and understands trading in the markets. This manager has a strategy and a view on the market and uses these pooled funds to access opportunities that regular people would not, in order to generate a good return for all the investors. 

The key benefit that mutual funds offer are:

1. Risk mitigation through diversification: Since the mutual funds have a large pool of funds to use, they can diversify their portfolios to ensure risk minimization for investors.
2. Expert management: The managers of these mutual funds are experienced in navigating the market landscape allowing them to time the market, and take bold calls that as retail investors we would not be able to.
3. Low barrier to entry: Mutual funds are easy to start investing with very low capital. Unlike the equity markets, where as an investor you would require significant capital to deploy in order to create a portfolio, you can simply buy into the portfolio with a lot more expertise.

The mutual fund charges these investors a nominal fee referred to as the ‘Expense Ratio’ to enable these services. 

 Mutual funds can be of multiple types but the core classifications include:

1. Equity Funds: These are funds that invest in the equities public markets, and are the most common type of mutual fund. Within the markets, the investment manager could follow multiple strategies, such as going after only Small Cap stocks, or investing in only the Energy sector or simply trying to match the Index. Equity funds generate return via the dividends of the companies these funds are invested in and the capital gains that come from equity markets, thereby offering the highest returns and consequently the highest risk.
2. Debt Funds: As the name suggests, these funds earn through investing in the Corporate or Government Debt markets. This helps these funds generate a close to guaranteed return, which they pass on to their investors in the form of interest payments. These funds are aimed specifically for people looking for safety of investments while earning a regular income/ return on their investments.
3. Hybrid Funds: These funds work across asset classes to help leverage the returns of equity while managing their risks with Debt. Here again, the funds would have a predefined strategy in place, and would typically generate an average return between the equity and the debt funds. 

Mutual funds are simple tools to help get an understanding of the markets and get access to products and trading ideas, that you would not normally have access to as retail investors.