Mutual Funds- A First Look (For Beginners)

February 06 , 2013

Your financial diet comprises equity, debt, real estate, gold and other assets. These are the types of financial products you can hold; and are variously called asset classes or portfolios. Examples include fixed deposits, shares and a plot of land you had purchased for investment purposes. We will call them the financial diet, since they are very similar to the regular diet that you consume.

Say you wanted to buy some sweets for Diwali. If you were clear that you wanted only Jalebis and nothing else, that is what you would buy. But if you and your family had varied tastes, and you did not want to spend time and effort choosing a dozen individual sweets, you would simply buy a box with an assortment of sweets. This is what a mutual fund is - a box that selects and holds these financial diet items. Just as your sweet box has no taste of its own (it is the sweets themselves that give you taste), the mutual fund has no returns of its own. It simply passes you the returns of the products it holds.

Currently, mutual funds can hold three diet items - equity, debt and gold. They are not permitted to hold real estate or other items like art (though some of these may come soon). These are like chocolates, sweets and dry fruits - you can choose an assortment containing all three, or only an assortment containing one of them. In all cases, the box costs slightly more than what the items bought in loose would have cost. That is a small price to pay for the variety and packaging it gives you. Similarly mutual funds charge a small fee, and package these items for you in the desired mix.

While funds began as a way for non-finance people to participate in the markets, they have now evolved into a rich bouquet of offerings catering to the needs of a broad set of investors. Backed by a pro-active and customer friendly regulatory regime, they have become one of the best vehicles to hold almost your entire financial portfolio. There are almost three dozen mutual funds who offer between them several thousand schemes to suit different needs. 

The major funds include ICICI Prudential, HDFC, SBI, Birla Sun Life, Franklin Templeton, DSP Black Rock, UTI, Kotak and Reliance Mutual Fund. Since many of the same players have insurance companies too, it is important to distinguish between the two.

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