Mutual Fund Basics.

If you are new to mutual funds or already started mutual funds without understanding the basics this article is exclusively for you.

First of all lets get familiarize where mutual fund houses are investing our money. They are investing our money into bonds and stocks.

1. Bonds
Bonds are basically the money which the government or a company may lend. Here the the government or the company will return an interest on the borrowed money. Bonds are usually done for a predetermined duration of time. Bonds are considered to be the least riskiest and less return means of investment method on the market.

2. Stocks
Stocks represent shares of ownership in a company. Examples of public companies include TCS, Reliance, HDFC etc. Stocks are considered to be the most common owned investment traded on the market. Since they fluctuate a lot they used to give more return and also most riskiest means of investment on the market.

Securities and Exchange Board of India – SEBI.
SEBI is the regulatory authorities who formulate policies to protect the interest of investors in Mutual Funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. It is these regulations that control mutual funds promoted by public or by private sector entities even including those promoted by foreign entities. SEBI used to approve the Asset Management Company (AMC) and they will manage the funds by making investments in bonds or stocks.

Association of Mutual Funds in India (AMFI)
The AMFI reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. AMFI is also engaged in promoting best industry practices and updating professional standards  in diverse areas such as transparency, valuation, disclosure  etc.

Mutual Fund Working
A mutual fund allows investors to put their money with a predetermined investment objective. Each mutual fund will have a fund manager who is responsible for investing the accumulated money into specific securities (bonds or stocks). When we invest in a mutual fund, we are buying units hence becomes a shareholder of the typical fund.

For long term goals [> 3 yers ] mutual funds are considered as one of the best available form of investment. They cost efficient and also easy to invest in. Thus by putting money in a mutual fund, investors can purchase bonds or stocks with much lower trading costs than direct investment into stock market.

We can say the the main attraction to mutual funds is diversification performed by an expert fund manager, by minimizing risk and maximizing returns. Here the we are not paying the price for taking the risk, but are getting all the benifits of diversification done by the fund manager.

Diversification
Diversification is simply spreading out your money across different types of investments. Proper diversification reduces risk up to certain extent. The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on.

If we try to do this ourself,it may take weeks to buy all these investments. But if we purchase a few mutual funds or set SIPs it could be done in a few hours. Here mutual funds automatically diversify our money into a predetermined category of investments (i.e. - growth companies, emerging, large size ,mid size companies, low-grade corporate bonds etc).