Mutual Funds is an investment vehicle that pools funds from investors and invests in equities, bonds, government securities, gold, and other assets. Companies that qualify to set up mutual funds, create Asset Management Companies (AMCs) or Fund Houses, which pool in the money from investors, market mutual funds, manage investments and enable investor transactions. Mutual funds are managed by sound financial professionals known as fund managers, who have the expertise in analysing and managing investments. The funds collected from investors in mutual funds are invested by the fund managers in different financial assets such as stocks, bonds, and other assets, as defined by the fund’s investment objective. Where and when to invest are some of the things taken care of by the fund managers, amongst many other responsibilities.
For the fund management, the AMC charges a fee to the investor known as the expense ratio. It is not a fixed fee and varies from one mutual fund to another. SEBI has defined the maximum limit of the expense ratio that can be charged on the basis of the total assets of the fund. In India, the capital markets regulator SEBI (Securities and Exchange Board of India) has encouraged the mutual fund industry by creating a system that works for the benefit of all stakeholders, including investors and mutual fund sponsors. Regulations are passed from time to time which improves functioning and help attract investments and generate growth.
Why To Invest In Mutual Funds?
Lets glance at why should one consider investing in mutual funds over other options to achieve their financial goals:
Professional Managers
Mutual funds are managed by professional people who have years of experience handling different types of assets. They are a group of dedicated team that handles all financial decisions based on the performance & prospects available in the market.
Offers Convenience
If saving time & convenience is what you seek then mutual funds are an ideal choice for investment. Because of low investment amount options, multiple choices based on one's life & financial goals, offering the ability to redeem them on any business day, mutual funds are much sought after.
Diversification
Mutual funds help counter risks to a large extent by equally distributing your investments across diverse range of asset classes. Mutual funds work by the adage “Do Not Put All Your Eggs in One Basket”.
Counter Inflation
Investing in mutual fund is a smart way of beating inflation as it helps investors to generate inflation-adjusted returns, without spending much time or energy on it. This choice of investing makes sure that the purchasing power of your money doesn't go downhill over some years.
Less Expensive
As compared to investing directly in capital market, mutual funds offer investors the advantage of low cost investment. Most stock options require a huge capital to begin with, on the other hand mutual funds can be started with as low as Rs.500 per month & investors can derive benefit from the long-term equity investment.
Safe & Transparent
Since every mutual fund is managed & regulated by SEBI, you need not worry as your investments are safe. SEBI has several regulations & legal frameworks in place which ensures that your investments are managed in a disciplined manner and generate high returns on your investments.
Types Of Mutual Funds
1. Equity Funds
These are type of funds that primarily invest in stocks and main investment objective of this class of funds is long term capital growth. Further, there are many types of equity funds which are categorized based on the size of the companies like large, medium or small.
2. Debt Funds
These funds are known as safe investments and provide fixed returns. In these, funds are invested in debt instruments like company bonds, government bonds, fixed income assets.
3. Money Market Funds
A money market mutual fund is a kind of mutual fund that invests in ultra-safe or low-risk securities. The purpose of the fund is to conserve the capital of the fund and it is unusual to see the NAV of a money market mutual fund go below one. The NAV can go below one if the securities do badly but it is quite rare to happen.
4. Income Funds
Income Funds mainly focus on generating regular income for the investors by investing in high dividend generating stocks, government securities, certificate of deposits, corporate bonds, money market Instruments, and debentures.
5. International Funds
The international fund usually refers to an investment or mutual fund composed of international bonds and foreign company stocks.
6. Bond Funds
A bond mutual fund invests in debt instruments issued by governments and/or corporations. Most of these funds are designed to provide interest income for shareholders in the form of dividends that represent the total interest payments made by all bonds in the funds portfolio.
7. Dividend Fund
This type of mutual funds invests in stock of companies that pay dividends, which are profits that a company shares with its stakeholders. These are income generating funds & tend to be less risky than other types of funds. It is a good choice of investment for those who seek regular payments over appreciation.
8. Balanced Funds
The strategy used by these funds are to maintain a certain percentage of mix of both fixed income & equities. Normally, a typical balanced fund will maintain a distribution of 60% equity & 40% fixed income. A similar type of fund known as “Asset Allocation Fund” follows on similar objectives that of Balanced Funds but then these kinds of funds do not hold any specified percentage of any asset class.
Disclaimer!
Mutual Fund investments are subject to market risks, read all scheme related documents carefully