Fund Fusion: Understanding Mutual Funds

Nilesh Shah, the Managing Director of Kotak Mahindra Asset Management, highlights that mutual funds are an excellent way to spread risk while benefiting from expert management. He recommends regular investments and a long-term approach to make the most of market growth.

Mutual funds work by pooling money from many investors to purchase a mix of investments such as stocks and bonds. These funds are managed by professionals who decide where to invest, aiming to generate profits for everyone involved. A fee is charged for managing the fund, which is deducted before the earnings are shared with the investors.

Imagine a group of friends contributing ₹1,000 each to buy a birthday gift. Instead of buying just one item, they purchase a variety—like a book, a watch, and a gift card—so everyone can enjoy something different. Similarly, a mutual fund pools money from many investors to buy a range of investments, allowing everyone to share in the profits.

In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI). The main types include equity funds (investing in stocks), debt funds (investing in bonds), and hybrid funds (a mix of both). Leading companies like HDFC, ICICI Prudential, and SBI offer these funds, with options for investing through Systematic Investment Plans (SIPs) or one-time investments. From 2018 to 2024, the mutual fund market in India has seen significant growth, with assets nearly doubling from ₹23.2 lakh crores to about ₹46 lakh crores. This growth reflects increasing interest and financial awareness among investors.

On an international level, mutual funds are regulated by organizations like the U.S. Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA). The main types of international mutual funds include actively managed funds, where professionals select the investments; index funds, which track a specific market index; and exchange-traded funds (ETFs), which are traded on stock exchanges like individual stocks. Global giants like Vanguard, Fidelity, and BlackRock provide these funds, offering investors the chance to diversify their portfolios and benefit from growth in various international markets.

Mutual funds simplify the investment process by pooling money from many people, allowing even small investors to participate. Options like SIPs enable regular savings, while fund managers take care of the investment decisions. However, mutual funds are still subject to market risks and can lose value, and the complexity of fund management might be challenging for some investors to understand. Despite these risks, mutual funds reduce overall investment risk by spreading money across various assets and help people learn more about financial planning and investment strategies.