Kya Mutual Fund Sahi Hai?

In the recent past two years, it can be seen there are multiple hoardings and intensive promotion with the campaign ‘Mutual Fund Saahi Hai’. Also, various television commercials have come up with the objective to familiarize the people at large about the functions of a mutual fund. On similar lines, this article will act as a brief to the product category of mutual funds.

To put things to perspective, let us understand it with a story:

The festival of Diwali is approaching in the next five days and you approach a confectionery store to purchase a packet of Cadbury Celebrations Gift Pack, to be gifted to your youngest cousin and the price of which is Rs. 1000. However, just then you realize you have spent all of our monthly savings and hence you have only Rs. 240 left with you. So, you decide to call all of the other cousins so that all of them could pool in their money and to gift the chocolates to your younger cousin. Three other cousins turned up and decided to pitch in Rs. 280, 380 and 100 respectively depending upon their person capacity.

As Diwali approached closer, the same Celebrations Gift Pack started being sold for Rs. 1400 instead of the previous price of Rs. 1000. So the elder brother decides to sell the Celebration Gift Pack and profit from this trade, which was proportionately divided amongst all other brothers, with respect to the amount they had pitched in and hence they received 336, 392, 532, 140 (24%, 28%, 38%, 10% ownership). After which all of them again pooled in their money to get a toy for their younger sibling and celebrated Diwali responsibly.

In the above example the important stakeholders are the Cadbury Celebrations Gift Pack and the amount which the brothers pooled in.

As we all know the celebrations gift pack contains various chocolates such as Gems, 5 Star, Dairy Milk, Perk and other chocolates very similarly a mutual fund is a bundled product which has various stocks packed into it. It is not possible for every single person to receive high-end professional financial service due to unavailability of the funds, less knowledge about investment opportunities, problems with numbers etc. Hence, the product of mutual fund was created where-in a professional known as the fund manager (Cadbury) is appointed who is responsible to make the particular fund perform. The fund manager decides upon the composition of stocks or bonds (Chocolates) in the fund (Celebrations Gift Pack) and you as a investor (Elder Brother) are given the freedom to entry or exit (Buy or Sell the Gift Pack) as per your convenience. Along with you, people of similar background from all over the nation or the world (Cousins) come forward and pool in the amount as per personal capacity.

Hence, Mutual Fund Sahi Hai! Because at least one of the different 2500 mutual funds would be definitely made for you to suit your purpose of investment

The composition of the stocks or bonds in the mutual fund, explains the nature of the fund. As per the norms of the regulator SEBI, Mutual funds can largely be categorized into Equity, Debt, Hybrid, Solution Oriented Funds or Other Funds. Which can further be divided into aggressive, medium-term, long-term, short-term, ultra-short term, diversified, sectoral, thematic, dynamic, Retirement Fund, Children’s Fund etc. As of December, 2018, approximately 44 different Mutual Fund Companies operate in India which have a total of over 2500 different schemes. More importantly, all investors are equally eligible for investing in the fund of their choice, this is only possible because negligible barriers are present. As of November, 2018 the Indian Mutual Fund Industry alone handles assets worth ₹24,03,134 crore ($348 bn) in total. Which is a big number in itself but a very smaller number when compared to the developed economies such as Canada ($1.47 tn, Nov 2018), USA ($18.7 tn, Dec 2017), Japan ($8.8tn, Dec 2017), China ($15.55 tn, Dec 2017) etc. Even though India has a higher savings rate as compared to all these mentioned economies.

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