Mutual Funds Part 1: What, Why and Why Not

Read Time: 3 minutes

We all have heard the ‘Mutual Funds’ at least once or twice, either from the television ads or stock market news. But what exactly are these? How are they beneficial- their pros and cons? I don’t think a lot of people know this.

So here we are with a short write-up about Mutual Funds. After all it’s always a good idea to have basic information about things that could affect our future investments. Let us begin –

WHAT

Mutual Funds are different from directly investing in the market- they are companies/institutions that pool money from a number of small investors and invest it in the market. These are managed by professionals who decide where to invest the sum, how much and for what.

The capital may be invested in stocks, securities or other assets that show potential so as to gain profit and income for all the contributors. Of course, the firm takes its own share too.

WHY

There are a number of ways in which Mutual Funds are beneficial. First, it gives a chance to small or inexperienced investors to gain profit as the money they investing towards the Mutual Fund is managed by experts or professionals. Thus the risk is relatively less than just shooting arrows blindly and making uncalculated decisions on their own. Second, they are affordable.

Also, diversification of your funds is an important and beneficial factor of Mutual Funds. Since the investments are done in a number of potential companies, even if the shares of one company falls, the loss isn’t that consequential since the company formed only a part of the investments the firm made. So you are less likely to lose it all as it may be in the case of a direct investment involving only one company.

WHY NOT

But as they say no risk no gain… though you get an income if the Mutual Funds you are associated with does good but in comparison of succeeding with direct investment, it is still less as you have to pay an annual fee and also a part of the profit may be taken by the firm.
Another thing is that you have no say in how or where your money is invested. You contribute towards the money pool alongside a number of other people and gain some margin of profit, that’s it. Though given the unpredictability of the market, it’s not a bad choice but for bigger gains, if that is your aim; bigger risks have to be taken.

Moreover, even if they are relatively secure, Mutual Funds are still subject to market risks. So in the end, it depends on you and your reason for investing- what kind of gains do you want. Short term, big, long-term, small? After considering all these, it’s up to you as an investor to choose whether or not to go for Mutual Funds.

In our next write-up, we will talk about how Mutual Funds work exactly and what are their different types. After all to make an educated decision you need to know these things as well!