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Know more about Mutual Funds

A mutual fund is an investment that pools together money from various investors, which are further managed and invested by a professional with a view to achieve more competitive returns. The money collected by the fund manager is thus, invested in different instruments such as shares, debentures and other debt instruments based on the stated objective of the fund. The capital generated from these investments is shared by the holders on the basis of the investments made by them.

Mutual fund investment is the most suitable instrument for most people as it provides an opportunity to invest in a diversified fund through a professional at a relatively low cost. An individual usually finds it difficult to keep a track of his investments, therefore a professionally qualified and experienced fund manager makes the task easy.

The mutual funds industry in India provide investors with a number of products which aim towards shares, debentures, fixed interest securities and many more.

Types of Funds

  • Open and Closed ended funds


An open ended fund does not have a fixed maturity and is always available for subscription. The distinct feature of an open-ended fund is liquidity where an investor can buy and sell units at net asset value (price of a unit of a fund) related prices.
A close ended fund on the other hand is a fixed maturity period, usually ranging from 3-15 years and the fund is open only during a specific period for subscription. The unit capital in this scheme is fixed.

  • Load Funds and No-Load Funds


Load funds refer to the funds that levy charges at the time of entry or exit to the fund from the investor; whereas a no-load fund as the name suggests does not charge anything from the investor at the time of entry or exit to the fund. Entry load is the load charged at the time of entering into the fund by deducting a specific amount of money from the initial contribution towards a scheme. There are a few funds, charging a management fee, where the initial expenses are borne by the Asset management Company/Fund Manager. Here the individual enters or exits depending upon the NAV (net asset value) of the fund.

  • Debt Funds


Debt funds are fixed interest funds which can invest in long-term or short-term bonds. The main objective of investing in a debt fund is to preserve the investment while getting the best interest available. These funds invest in fixed return investments like bonds. Therefore, the risk borne by the investor is lower than any other equity fund.
Debt funds can be classified into three types which are income/bonds, liquid/money market and gilts schemes. Income/bond schemes are the ones that invest in long and medium term instruments like corporate bonds, fixed deposits, etc. Liquid/money market schemes invest in short-term instruments like treasury bills and commercial paper, whereas Gilt funds invests in papers issued by the government. The maturity in these schemes are either long or medium term depending upon the objectives of the scheme.

  • Equity Funds


Equity fund also known as a stock fund, usually invests in equities of listed companies. They principally invest in the securities in share markets which can be either domestic or worldwide markets. It allows the investor to access a diversified portfolio managed by a professional.

There are different types of equity funds in the market, therefore the level of risk in each fund is different depending upon the fund:

  • Balanced Funds


A fund that has a stock as well as a bond component in a single portfolio.. It targets to provide the investor with growth as well as regular income. A unique feature of such funds is that, they manage the downturns in the stock market without much loss to the investor. But, at the same time, they increase less even in a booming market.
Balanced funds, also sometimes known as hybrid funds, invests in various tools thus avoiding excessive risk.

Benefits of Mutual Funds

  • Diversification

A unique feature of Mutual funds is diversification where there is an option of investing into various schemes depending upon the market situation which keeps the finances safe. The value of all funds keep fluctuating but does not go low at the same time, thus reducing the risk.

  • Liquidity

In an open-ended fund, one can get the money back instantly according to the net asset value of the fund. Also, units in a close-ended fund can be sold at the prevailing market prices on a stock exchange. Thus, providing liquidity to the investor.

  • Choice of Schemes

Mutual Funds provide the investor with a stock of schemes to choose from depending upon the investors needs.

  • Professional Management of Funds

Allows professional management where an experienced professional tracks the investors money along with the performance of various funds. The fund manager also guides the investor to invest in the funds, keeping in view the objectives of each scheme.

  • Affordable
An investor can start investing in mutual funds with as low as Rs.1000. Thus, making it affordable for anyone.
 

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