Vikash Agarwal

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No matter where the word came from, mutual funds, like any other investment, have their strengths and weaknesses that you need to know before you put in your money. I’m not sure where the mutual word in mutual funds comes from; perhaps it’s so named because the best funds allow many people of differing economic means to mutually invest their money for easy diversification with access to professional money managers and low investment management costs. A mutual fund is a collection of investment money pooled from many investors, which is invested with a specific objective. When you invest in a mutual fund, you buy shares and become a shareholder of the fund. The fund manager and his team of assistants determine which specific securities for example, stocks or bonds they should invest the shareholders’ money in, in order to accomplish the objectives of the fund and keep shareholders happy.

       A misconception some investors hold regarding mutual funds is that they invest in stocks and, therefore, are too risky. They don’t, and they’re not. By using mutual funds, you can invest in a whole array of securities, ranging from money market funds, bonds, stocks. All mutual funds aren’t created equal. Some funds, such as money market funds, carry virtually zero risk. Bond funds that invest in shorter-term bonds don’t generally budge by more than several percentage points per year. And you may be surprised to know that some conservative stock funds aren’t that risky if you can plan on holding them for a decade or more.

        Mutual funds allow you to diversify your investments — that is, invest in many different industries and companies instead of in just one or two. By spreading the risk over a number of different securities representing many different industries and companies, mutual funds lower your portfolio’s instability and the chances of a large loss. Mutual funds enable you to give your money to the best money management firms and managers in the country. Mutual funds are the ultimate couch potato investment! However, unlike staying home and watching television or playing video games, investing in mutual funds can pay you big rewards.

        What’s really cool about mutual funds is that when you understand them, you realise that they can help you meet many different financial goals. Maybe you’re building up an emergency savings stash of three to six months’ living expenses. Perhaps you’re saving for a home purchase, retirement, or future educational costs. You may know what you need the money for, but you may not know how to protect the money you have and make it grow. The best mutual funds are often the best financial intermediaries for you to invest through because they charge lower management fees to manage your money and allow you more choice and control over how you invest your money. Mutual funds are investment companies that pool your money with the money of hundreds, thousands, or even millions of other investors. The company hires a portfolio manager and a team of researchers whose full-time job is to analyze and purchase investments that best meet the fund’s stated objectives.

        A mutual fund management team does more research and due diligence than you could ever have the energy or expertise to do in what little free time you have. Investing in mutual funds can help your friendships, and maybe even your love life, because you’ll have more free time and energy! Companies whose securities trade in the financial markets are required to issue reports every three months detailing their revenue, expenses, profits and losses, and assets and liabilities. Unless you’re a numbers geek, own a financial calculator, and enjoy dissecting tedious corporate financial statements, this first task alone is reason enough to invest through a mutual fund and leave the driving to the mutual fund management team.

Most fund managers log thousands of frequent-flier miles and hundreds of hours talking to the folks running the companies they’re invested in or are thinking about investing in. Because of the huge amount of money they manage, large fund companies even get visits from company executives, who fly in to grovel at the fund managers’ feet.

      Corporate managers have an irritating tendency to talk up what a great job they’re doing. Some companies may look as if they’re making the right moves, but what if their products are soon to lag behind the competition? The best fund managers and their researchers take a skeptical view of what a company’s executives say — they read the fine print and check under the rugs. They also keep on top of what competitors are doing. Sometimes they discover investment ideas better than their original ones this way. Another way the mutual fund managers find out whether a company’s public relations story is full of holes instead of reality is by speaking with the company’s customers, suppliers, competitors, and other industry experts. These people often have more balanced viewpoints and can be a great deal more open about the negatives. These folks are harder to find but can provide valuable information.

Are you, as the investor, going to do all these tasks and do them well? Nothing personal, but I doubt that you will. A good mutual fund management team happily performs all the required research for you, does it well, and does it for a fraction of what it costs you to do it haphazardly on your own. Chances are the last thing you want to do with your free time is research where to invest your savings. If you’re like many busy people, you’ve kept your money in a bank just to avoid the hassles. Or maybe you turned your money over to some smooth-talking broker who sold you a high-commission investment that you still don’t understand but are convinced will make you rich.

       Mutual funds are a cheaper, more communal way to get the investing job done. A mutual fund spreads out the cost of extensive and expensive research over thousands of investors. Some of the best recommended tax savings mutual funds for investments are: