Mutual Funds

My blog till date concentrated on the most basic and fundamental aspects of the finance industry. Ultimately this blog aims at educating the users with the basics of financial jargaon and then proceed on to the investments, suggestions, reviews and whatever.

In my last attempt, i tried to explain the meaning of insurance and the types of insurance available today. Now we will explore the most talked about concept now a days, that of Mutual Fund.

A Mutual Fund is an investment strategy wherein a professional like a Mutual Fund Manager will gather amounts from the public and the investment organisations in small/ big amounts to invest in stocks of diversified companies. The main aim is to reduce the risk that is associated with the individual stock picks. For ex: I invest, huge sum of money, say 1 lakh in purchasing stocks of a reputed company like Reliance, when the share price is around 1500 Rs. per share. I buy with an intention that the share price of the company will rise in the near term due to the good performance of the company. But due to some external factors, say political, the share price drops to 1000 Rs. per share. I am at a loss of 500 per share, where in total the loss is huge.

The same investment, of 1 lakh, if i make it in a reputed and well performing mutual fund, the investment is diversified as the amount is used to buy stocks of different companies which are supposed to be good performers. Even if Reliance share drops, my other companies can still fare well and the overall value of the portfolio can increase. In this case, the risk is much lower and the chances of creating wealth over long term is better. So, even if the sensex falls, there is no necessity that your investment value reduces.

It is therefore always advisable to invest in mutual funds which have a proven track record.