Mutual Funds

Table of Contents

What is mutual fund?

What is Mutual Fund?

A mutual fund is a type of investment where a number of people’s contributions are combined to purchase a range of stocks, bonds, and other securities. This mix of investments is managed by a professional money manager, The combined holdings of the mutual fund are known as its portfolio.that is designed to align with the investment goals specified in the fund’s prospectus.

When investing in a mutual fund, people have access to a wider variety of assets than when they buy a single stock or bond, which can help lower risk. Returns to investors are determined by how well the fund performs, mutual funds can provide professionally managed portfolios of stocks, bonds, and other asset types to small or individual investors.

How mutual funds work

A mutual fund is a type of investment that pools money from many people in form of Sip or lumpsum amount to invest in a variety of assets like stocks, bonds, or other securities.
Many investors deposit money as much as they can each month through buying a share of mutual fund, and a fund manager manages that money. Mutual funds are suitable for investors who do not have much knowledge of the market. In a mutual fund, your money is managed by a market professional who diversifies the money pooled from people like you across different asset classes with varying degrees of risk.
When all of the investors buy shares in a mutual fund, they collectively fund the fund’s investment portfolio. Thus, a person who invests in a mutual fund becomes a partial owner of all the underlying assets held by the fund. When investing in a single mutual fund, an individual investor can access a significantly larger portion of the market than they could if they made separate purchases.
The fund manager oversees the portfolio, making decisions about how to allocate money across sectors, industries, companies etc. based on the stated strategy of the fund. This diversification and access is a key benefit of mutual funds for individual investors.

Types of mutual funds

Various types of mutual fund categories are designed to allow investors to choose a scheme based on the risk they are willing to take, the investable amount, their goals, the investment term, etc.
All these schemes can be classified in different ways based on their various characteristics.

Types of mutual funds Schemes based on Asset Classes

Equity funds: The primary asset class for equity funds is company shares. The criteria provide that an equity mutual fund scheme must allocate at least 65% of its assets to investments in stocks or equity-related securities. To reduce the risk, the remaining money is placed in more secure asset groups.

Equity funds can be again categorised in many ways, such as:

  • Based on the way they are managed – active and passive funds.
  • Depending on the market capitalization of the stocks–small-, mid-, multi-, and large-cap funds—that they invest in.
  • Depending on where they are located, both local and foreign funds. They may also be categorized as single-country, regional, or broad-market funds.
  • Predicted on the industry in which they make investments—pharma, FMCG, real estate, etc.

Equity funds are suitable for those who have long investment horizons.

Debt funds: Debt funds invest their assets in fixed-income instruments, such as corporate/government bonds, T-bills, or certificates of deposits. Compared to equity funds, debt funds are less risky and have lower expense ratios.

Hybrid funds: Hybrid funds consist of both debt and equity components. This type of mutual fund is suitable for investors with a moderate risk appetite.

Money market funds: Money market funds normally invest in low-risk, short-term securities such as T-bills, certificates of deposit, commercial paper, etc. They offer high liquidity; investors often invest in the funds as a short-term cash management tool.

Index Funds
Index funds invest in stocks that correspond with a major market index such as Nifty 50. This strategy requires less research from analysts and advisors, so fewer expenses are passed on to shareholders, and these funds are often designed with cost-sensitive investors in mind.

Advantages of mutual funds

Mutual funds offer professional investment management and potential diversification.

  • Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.
  • Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
  • Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
  • Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

Risks in mutual funds

All funds carry some level of risk. Because the value of the securities held by a fund can decrease, investing in mutual funds has a risk of losing some or all of your money. Dividends or interest payments may also change as market conditions change.

The past performance of a fund is not as significant as one may believe because past performance cannot guarantee future returns. However, historical performance might provide insight into the stability or volatility of a fund over time. The riskier an investment is, the more volatile the fund.

How to Invest in Mutual Funds

These days, purchasing mutual funds is a relatively easy procedure that includes the following steps:
1. Make sure you have a brokerage account with enough cash on hand, now these days every broker provide platform to invest in mutual fund through their app.
2. Identify specific mutual funds that match your investing goals in terms of risk, returns, fees, and minimum investments. Many platforms offer fund screening and research tools.
3. Decide how much you wish to invest initially, then initiate your investment. You can usually set up periodic automated investments if you’d like.
4. Monitor and review performances periodically, making adjustments as needed.
5. Mutual fund shares are “redeemable,” meaning investors can sell the shares back to the fund at any time. The fund usually must send you the payment within seven days.

Before buying shares in a mutual fund, read the prospectus carefully. The prospectus contains information about the mutual fund’s investment objectives, risks, performance, and expenses.

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