Mutual funds

What Are Mutual Funds?

Mutual funds are investment vehicles that pool money from multiple investors and use that money to invest in a diversified portfolio of stocks, bonds, or other securities. The mutual fund is managed by a professional fund manager, who makes investment decisions on behalf of the investors.

When you invest in a mutual fund, you purchase shares of the fund, and the value of those shares is based on the performance of the underlying investments. The price of a mutual fund share is calculated once a day base on the net asset value (NAV) of the fund. The NAV is calculated by subtracting the fund’s liabilities from its assets and dividing the result by the number of shares outstanding.

Mutual funds offer several benefits to investors, including diversification, professional management, and liquidity. Because mutual funds invest in a variety of securities, they can help investors spread their risk across many different assets. Additionally, mutual funds are managed by investment professionals who have experience and expertise in the market, which can potentially lead to better investment returns. Finally, mutual funds are generally very liquid, meaning that investors can buy and sell shares on any business day.

Benefits of Mutual funds

Create Wealth

By starting early, an investor can take advantage of time and compounding interest, the combination of which can multiply one’s wealth beyond imagination.

Power of Compounding

The rule is simple, the sooner you start, the more time you give to your money to grow.

To Beat Inflation

Inflation beating returns play a vital role in improving one’s financial circumstances over the period of time.

To Save Tax

Returns on Equity Mutual Funds attract short term capital gains of 15% on SIP/Lump sum, if the investment is redeemed within 12 months. After one year, the returns are tax free.

Types of Mutual Funds :

Mutual Fund houses (AMCs) offer a wide variety of schemes based on needs, age, financial position, risk tolerance and return expectations of various investors. These schemes can be classified into different categories and subcategories based on their investment objectives or their maturity periods.

Classification Based On Objective

While there are a wide variety of mutual funds offered in the market, each has its own set of goals. The goal is the investment objective, set by the fund manager, based on categories of stocks and bonds that fund’s portfolio will house.

There are many different types of mutual funds, each with its own investment objective and strategy. Here are some of the most common types of mutual funds:

Equity funds

These mutual funds invest primarily in stocks. They can focus on different types of stocks, such as large-cap, mid-cap, or small-cap stocks, or they can focus on specific sectors or industries.

Fixed-income funds

These mutual funds invest primarily in bonds and other fixed-income securities. They can focus on different types of bonds, such as government bonds, corporate bonds, or municipal bonds.

Balanced funds

These mutual funds invest in a mix of stocks and bonds, with the goal of achieving a balance between growth and income.

Money market funds

These mutual funds invest in short-term, low-risk securities, such as Treasury bills or commercial paper. They are designed to provide a stable value for investors and are often used as a temporary place to park cash.

Index funds

These mutual funds track a specific market index, such as the S&P 500, and aim to match its performance. They are often lower in cost than actively managed funds because they do not require a fund manager to make investment decisions.

Sector funds

These mutual funds invest in specific sectors or industries, such as technology, healthcare, or energy. They are often more volatile than broader market funds because they are more focused on a specific area of the market.

International funds

These mutual funds invest in stocks and bonds from companies outside of the investor's home country. They can provide exposure to foreign markets and can help diversify a portfolio.

Alternative funds

These mutual funds invest in assets other than stocks and bonds, such as commodities, real estate, or private equity. They are often used to diversify a portfolio beyond traditional investments.

Why invest in Mutual Funds ?

Mutual funds offer several benefits to investors. Here are some of the key advantages:

Diversification

Mutual funds invest in a diversified portfolio of stocks, bonds, or other securities. This helps spread the risk across many different assets, reducing the impact of any one investment on the overall portfolio. Diversification can help investors reduce risk and potentially improve returns.

Professional management

Mutual funds are managed by professional fund managers who have experience and expertise in the market. These managers use their skills to research and analyze investments, and make informed decisions about which securities to buy and sell. This can potentially lead to better investment returns than if an investor tried to manage their portfolio on their own.

Accessibility

Mutual funds are accessible to investors with a wide range of investment amounts, from just a few hundred dollars to hundreds of thousands or more. This makes them a popular choice for both novice and experienced investors.

Liquidity

Mutual fund shares are generally very liquid, meaning that investors can buy and sell shares on any business day. This makes it easy for investors to access their money when they need it.

Affordability

Mutual funds offer investors the ability to invest in a diversified portfolio of securities at a relatively low cost. Because mutual funds pool money from multiple investors, the costs of investing are spread across many people, reducing the cost for each individual investor.

Transparency

Mutual funds are required by law to disclose their holdings, fees, and other important information to investors. This transparency helps investors make informed decisions about whether to invest in a particular fund.

Systematic Investment Plan

A Systematic Investment Plan (SIP) is a type of investment plan offered by mutual funds in which an investor can invest a fixed amount of money at regular intervals, typically monthly or quarterly. The investment amount can be as low as a few hundred rupees, making it an accessible investment option for many individuals.

With an SIP, investors can benefit from rupee cost averaging, which is a strategy where an investor invests a fixed amount of money at regular intervals, regardless of the market conditions. This means that the investor will buy more units of the mutual fund when prices are low and fewer units when prices are high. Over time, this can help reduce the overall cost of investment and potentially increase returns.

However, it’s important to note that like any investment, SIPs also carry risks, and investors should carefully evaluate the investment objectives, fees, and risks associated with a particular mutual fund before investing.

SIPs offer several benefits to investors, including:

An SIP helps investors develop a disciplined approach to investing by investing a fixed amount at regular intervals.
SIPs allow investors to start investing with a small amount of money, making it accessible to a wide range of investors.
By investing a fixed amount at regular intervals, investors can benefit from rupee cost averaging and potentially reduce the overall cost of investment.
Over time, the returns generated from an SIP can compound, potentially leading to significant wealth creation over the long term.
Investors can choose the frequency of investment (monthly or quarterly), the amount of investment, and can also change or stop the SIP at any time.