What are Mutual funds?
A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from the number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments, and other securities. And the income generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies
Mutual funds are ideal for investors who either lack large sums for investment, or for those who neither have the expertise nor the time to research the market, yet want to grow their wealth. The money collected in mutual funds is invested by professional fund managers in line with the scheme’s stated objective. In return, the fund house charges a small fee which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI).
Type of Mutual funds
Mutual funds are primarily classified as;
Open-ended funds are available for subscription and redemption on any business days throughout the year, An open-ended scheme is perpetual and does not have any maturity date.
Closed-ended funds are open for subscription only during the initial offer period and have a specified tenor and fixed maturity date. Pre-mature redemption is not permitted in Closed-end funds. units of a closed-end fund are listed on the stock exchange to buy and sell for investors seeking to exit the scheme before the maturity
In addition to these, you can also choose a mutual fund based on the underlying asset class and the investment objective of the fund, there are many types of mutual funds suitable for different investors with differing needs and risk profiles. Based on risk profiles mutual funds are classified into two categories Equity Funds and Debt or Fixed income funds.
Equity Funds
The primary objective of equity funds is to invest in equity stocks and equity-oriented instruments and provide capital appreciation over the medium to long term the various types of equity funds include diversified funds, focused funds, sectoral funds, index funds, etc.
Diversified equity funds invest in a wide range of stocks across various sectors and market capitalization levels according to the investment objective they aim to provide long-term appreciation to your invested money while reducing concentration risks that is high exposure to a single sector or asset class. The various types of equity funds include Large Cap Funds, Midcap Funds, Small cap Funds, and Multi cap funds based on market capitalization.
Focused funds are concentrated portfolio and invest only in equity securities of companies with certain defined market capitalization or in those that operate in a single sector or those that in general fall within a predefined set of parameters a popular type of focused funds is Sectoral funds invest in stocks of a particular sector or industry such as technology, pharma, etc. sectoral funds have the potential to outperform diversified equity funds in case the underlying sector registers higher growth than other industries but they do carry higher risk by investing in only a single sector.
Index equity funds invest in all securities that form part of a market index such as the S&P BSE Sensex or Nifty 50 and they aim to replicate the returns of the underlying index as closely as possible, therefore these funds help provide investors broad exposure to the markets.
Debt or Fixed income funds
These funds primarily invest in debt securities such as bonds, debentures, government securities, etc., they are considered to be less risky and can provide modest returns. The various types of debt funds include income funds, gilt funds, liquid funds, and fixed maturity plans.
Income funds primarily invest in a mix of corporate bonds and government-issued securities seeking to provide returns in the form of income with potential capital appreciation.
Gilt funds invest in government securities of medium to long-term maturities they do not carry default risk however prices and returns over the short term say less than one year can be sensitive to changes in interest rates.
Liquid funds are suitable for investors who seek a high degree of liquidity and can tolerate only minimal volatility, these funds invest only in highly liquid money market instruments such as Treasury bills, commercial papers, and certificates of deposits. their prices and daily returns do not vary much so they are considered a more stable form of investment that can offer moderate returns and considered a good alternative to fixed deposits.
Fixed Maturity Plans (FMPs) are close-ended debt funds with a fixed tenure aligned with the maturity dates of the securities held by the fund this synchronized maturing takes care of interest rate risk or reinvestment risk, they require you to remain invested for a finite period and unlike liquid funds, they are not easily redeemable but because the returns are more stable and predictable within a range.
Below are some other popular categories of mutual funds-:
Hybrid funds
If you are looking for higher returns but are only willing to take Low-Risk Hybrid/Balanced Fund is the best option, they give you the benefit of capital appreciation from investing in equities as well as the stability from investing in debt securities, balanced funds are usually equity-oriented hybrid funds with a minimum of 65 percent exposure in equities and the rest in debt.
However, there can also be other asset allocation patterns among hybrid funds for instance;
Monthly income plans are debt-oriented hybrid funds that aim to generate regular income primarily through debt instruments while also investing a small portion into equities.
Gold ETFs
You can even access gold by investing in exchange-traded gold mutual funds or gold ETFs. in simple terms, each unit of a gold ETF represents one gram of gold and you can benefit from a rise in the gold prices without actually purchasing solid gold and then worrying about how or where to store it safely.
Fund of funds
These are funds that themselves invest in units of other mutual funds thereby giving you the benefit of multiple funds in one, these funds can also help you access stocks or industries which may not be easily accessible for you to invest directly. some fund of funds also enables you to invest in international stocks or mutual funds
Conclusion
Mutual funds are investment products that combine different instruments such as stocks, bonds, or both into a single product managed by an expert fund manager. Once investors put their money in a mutual fund scheme the fund manager then invests this collected pool of money according to the predefined investment strategy of that scheme. While investing in a mutual fund you should look at where the fund invests the time horizon of your investment the risk profile of the product, consistent historical performance across time horizons, and more importantly if the fund’s investment objective matches your own.
Happy Investing!!!!
