All you need to know about Mutual Funds

When we hear the word savings the first thing that comes to our mind is either a fixed deposit or either a recurring deposit as they have low risk. But with low risk they too have a low rate of return.

One of the investment vehicle which has recently started gaining popularity is mutual funds. However, still a majority of people think that mutual funds are risky and should not be trusted as a good investment avenue.

If you too belong to that category of people who want to invest in mutual funds but are not sure about it then you have landed up at the right place.

We are here you to clear your doubts related to mutual funds.

Before investing your hard earned money into something, it is essential that you understand the basics related to it, how they work and what are its types and benefits.

This is exactly what we will be covering today in this article for you.

What are Mutual Funds?

Mutual Funds are investment vehicle wherein the money of investors is pooled in together in a professionally managed investment avenue. This pool of money is further invested in securities, bonds, money market instruments or other assets. The return generated on mutual funds is then distributed to the investors.

Mutual Funds have grown to be the most easiest and popular option for investors who wish to increase their wealth.

All the Mutual Funds are managed by expert and professional fund managers who aim to generate maximum returns from a fund and keep in mind the various factors while choosing the funds.

The investors can choose from a variety of funds in the market based on their investment objectives and the risk appetite they have. The portfolio of the funds is then structured to meet the objectives which had been stated in its prospectus.

How does a Mutual Fund works?

As mentioned above, mutual funds are a pool of money collected from various investors. These investors share the common investment objective and hence based on the objectives of the investors this pool of money is further invested in various instruments.

If the aim of the investors is to generate long term capital gain then the best suited mutual funds for them are equity mutual funds.

Investors who wish to generate a fixed income and are not likely to take much risk should prefer investing in mutual funds which further invest in bonds.

The change in the total market capitalization of the fund indicates its performance. Market capitalization is nothing but a product of outstanding shares of the company and the current market price per share.

Net Asset Value of the funds also plays an important role in considering the funds to be selected for investment. NAV is the price at which the funds are brought or sold in the market and is calculated at the end of each trading day.

If you are beginner to investing then the best option to start with is by investing in a Systematic Investment Plan (SIP).

Advantages of Mutual Funds

Before moving to the types of mutual funds available in the market for investments let us first understand that what the benefits of mutual funds to the investors are.

• Mutual fund companies have professional fund managers who take the decision of investing the investors’ pooled money keeping in mind their interests and objectives of investment.
• Mutual funds are comparatively an affordable and economic form of investing specially for those investors who wish to invest in small amount.
• Various mutual funds allow you to switch funds and get the best returns from the market.
• You can achieve in mutual funds based on your goals and objectives. There are funds with different risk and return profile and you can invest according to your goal in them.
• With mutual funds you can mitigate the risk by diversifying your investments as the funds are invested in different class of assets.
• Mutual funds are a flexible investment option.
• Mutual fund investments offer liquidity to its investors as you can redeem your investments at any given point of time.
• Buying, selling and redeeming of mutual funds is very simple.
• ELSS come with the dual benefits of tax deductions and wealth creation.
• Mutual fund investments in India are regulated by SEBI and hence are safe investment avenues.
• It is easy and handy to track your mutual funds portfolio and to analyse the performance of your mutual fund investments.

Types of Mutual Funds:

Mutual Funds can be broadly categorized into three categories on the basis of their risk and return profiles. Before investing in any of these mutual funds you should always assess your financial goals and requirements and then proceed by investing in those funds which can serve your requirements.

Following are the three types of mutual funds:

1. Equity Funds: Equity Mutual funds or Equity Funds are those that aim at generated high returns by investing the money of the investors in the shares of different companies. Since you purchase the shares of the company, the performance of your equity fund depends on the performance of the company. They are known for generating returns higher than those generated by fixed deposits and debt funds. Equity funds invest up to 60% of its assets in equity shares where the investments can be either growth oriented or value oriented.

The remaining amount is invested either in debt funds or other money market instruments.

They are risky when compared to debt funds and hence your investment in mutual funds should be in line with your risk appetite, time of investment, and financial objective.

They are suitable for investors who are new to the world of investing and want a good exposure to the stock market. Equity funds can further be categorized on the basis of sector and theme of investment, market capitalization, and investment styles followed.

• Debt Funds: Debt Mutual Funds or Debt Funds those funds which invest the pooled sum of money in securities generating fixed income like corporate bonds, commercial papers, government securities etc. The main objective of investing in debt funds is to earn interest and capital appreciation over a period of time. The funds are invested in the securities on the basis of their credit ratings. A higher credit rating ensures regular interest as well as payment of principal at the time of maturity.

Debt funds are most suitable for conservative investors who want to invest for either for a short-term or a medium-term investment horizon.

• Hybrid Funds: Hybrid funds are those that invest in both debt and equity securities to achieve maximum diversification and higher returns. They aim at generating income in the short-run and wealth creation in the long-run through a balanced portfolio. They are regarded safer investment options compare to equity funds. Since they have both the components of debt and equity, the equity in the portfolio helps to deal with the equity wave while the debt component provides a cushioning effect to the entire portfolio.

Hybrid funds can further be categorized broadly into equity-oriented hybrid funds, debt-oriented hybrid funds and balanced funds.

Disadvantages of Investing in Mutual Funds

Like any other market investments, mutual funds too have some disadvantages and hence it is always advised to be cautious while investing in them. Following are some of the disadvantages of mutual fund investments:

• The returns from mutual funds can fluctuate depending upon the market conditions.
• The cost of purchasing mutual funds is higher which is called the expense ratio. This cost can be in the form of fee or commission.
• They are less transparent as to where the pool of money is being further invested.
• The returns generated through mutual funds are received late.

In the end, we can conclude that mutual funds are relatively safer and easier way to start investing in mutual funds. But like any other investment, before investing in mutual funds one should examine their needs and requirements and investment goals and always be cautious while investing their hard earned money.

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