Before we learn about a Mutual Fund and the benefits of using one, you must know about Investments. Investments are nothing but the instruments through which you can grow the money that you put into your savings accounts. For example, when you invest in a property(land), if the price of the land goes up, you will earn a profit by selling it.
But it is always smart to invest in diversified opportunities because generally in any country’s economy if the price of one investment goes down, the other goes up. Hence, if you have diverse investments, the risk will be lowered.
What is a Mutual Fund?
A mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, bonds, treasury bills, etc. A professional fund manager is an expert who manages mutual funds.
What are Securities?
We know by now that a mutual fund entails stocks/equities, bonds, and other money market instruments. These are called securities.
Securities are of two types. Marketable securities and Non-marketable securities.
Marketable securities are liquid in nature because they can easily be sold through a secondary market(where a stock exchange broker/fund manager is involved) and converted into cash. Examples of marketable securities are stocks, mutual funds, treasury bills, etc.
Non-marketable securities cannot be easily sold to convert them into cash. Examples are savings accounts, fixed deposits, etc. There is no secondary market for these investments, unlike the marketable securities.
Think of Mutual funds as putting your eggs in more than one basket. Mutual funds are the most diversified investments as it contains a portfolio of securities.
There is a common saying that, don’t put all the eggs in one basket.
In other words, mutual funds are like a basket of eggs. Let’s say there are various baskets of eggs. Some baskets have white, some have brown, and some have a mixture of both colours — likewise, different mutual funds can have stocks of different companies, several types of bonds, or a blend of both.
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