What is Mutual Fund?
A mutual fund is an investment tool that brings together money from multiple investors who share similar investment goals. This pooled money is then invested in various assets, aligning with the fund’s stated objectives. Professional management of these investments is carried out by an asset management company (AMC).
Investors in a mutual fund own shares, which represent a stake in the fund’s overall holdings. This structure allows individual investors to access a diversified portfolio of securities managed by professionals, all at a comparatively low cost. In essence, mutual funds provide an avenue for everyday investors to participate in a broad range of investments, even with limited resources.
Benefits of Investing in Mutual Funds:
Investing in a mutual fund offers you a gamut of benefits. Some of them are as below:
Small investments: With mutual fund investments, your money can be spread in small bits across varied companies. This way you reap the benefits of a diversified portfolio with small investments.
Professionally managed: The pool of money collected by a mutual fund is managed by professionals who possess considerable expertise, resources, and experience. Through analysis of markets and economy, they help pick favorable investment opportunities.
Spreading risk: A mutual fund usually spreads the money in companies across a wide spectrum of industries. This not only diversifies the risk but also helps take advantage of the position it holds.
Transparency and interactivity: Mutual funds clearly present their investment strategy to their investors and regularly provide them with information on the value of their investments. Also, a complete portfolio disclosure of the investments made by various schemes along with the proportion invested in each asset type is provided.
Liquidity: Closed-ended funds can be bought and sold at their market value as they have their units listed on the stock exchange. In addition to this, units can be directly redeemed to the mutual fund as and when they announce the repurchase.
Choice: A wide variety of schemes allow investors to pick up those which suit their risk/return profile.
Regulations: All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor
Types of Mutual Funds:
1. Equity Funds:
Equity funds invest most of the money that they gather from investors into equity shares. These are high-risk schemes and investors can also make losses since most of the money is parked into shares. These types of schemes are suitable for investors with an appetite for risk.
2. Debt Funds:
Debt funds invest most of their money into debt schemes including corporate debt, debt issued by banks, gilts and government securities. These types of funds are suitable for investors who are not willing to take risks. Returns are almost assured in these types of schemes.
3. Balanced Funds:
Balanced Funds invest their money in equity as well as debt. They generally tend to skew the money more into equity than debt. The objective, in the end, is again to earn superior returns. Of course, they might alter their investment pattern based on market conditions.
4. Money Market Mutual Funds:
Money Market Mutual Funds are also called Liquid Funds. They invest a bulk of their money in safer short-term instruments like Certificate of Deposit, Treasury and Commercial Paper. Most of the investment is for a smaller duration.
5. Gilt Funds:
Gilt Funds are perhaps the most secure instruments that are around. They invest the bulk of their money in government securities. Since they have the backing of the government they have considered the safest mutual fund units around.