Friday, May 17, 2024

Diving Into The World Of Mutual Funds

Introduction

Given life’s uncertainties, many ponder where to invest and seek to save money wisely. Choices range from investing in something which give them maximum returns. In this article we will understand what is mutual funds, its type and reasons for investing in these funds.

Meaning of Mutual Fund

A mutual fund is a group that collects money from many people to buy stocks, bonds, and short-term debt. The things it owns are its portfolio. People who want to join in can buy shares of the mutual fund. These shares show how much of the fund they own and the money it makes. Mutual funds let small or individual investors have a mix of things managed by professionals or fund managers. But, keep in mind, mutual funds have yearly fees or commissions that might impact how much money you make from them.

Types Of Mutual Funds

1. On the basis of maturity period

A. Open Ended Funds

The funds which don’t have a set end date. Investors can buy or sell units whenever at the net asset value. They’re like liquid funds, and you can invest or redeem anytime during the year.

B. Close Ended Funds

These are the funds which have a fixed maturity period. Unlike open-ended funds, you can’t subscribe to them all the time. They’re only open for investment during a specific time, usually when they’re first launched.

C. Interval Funds

These are funds which are a mix of open-ended and close-ended funds. They trade on the stock exchange at scheduled intervals.

2. On the basis of investment objective

A. Equity fund

It is a type of mutual fund that mostly puts money into stocks. In India, according to current SEBI Mutual Fund Regulations, an equity mutual fund must invest at least 65% of the scheme’s assets in stocks and related instruments. It carries a high risk but also potential of high returns.  The investment goal under such kind of funds is to achieve long term growth.

B. Income fund

It is a mutual fund that aims to give investors a steady income from a mix of investments. These funds put money into things like bonds, debentures, and government securities. Because they invest in less risky stuff, the chance of loss is low, and the income is steady. The main goal is to keep the investment safe and achieve moderate growth.

C. Balanced fund

A mutual fund that usually has both stocks and bonds. It’s like a basket of things you can buy as an investor. Usually, these funds keep a set mix of stocks and bonds, like 70% in stocks and 30% in bonds. Bonds are like loans that usually pay a steady, fixed rate of return.

D. Liquid Funds

As the name suggests, mostly invest in easily convertible money market instruments and short-term debt securities, offering high liquidity. They put money into very short-term things like Treasury Bills, Commercial Paper, Certificates Of Deposit, and Collateralized Lending & Borrowing Obligations with maturities of up to 91 days to get the best returns while keeping things safe and highly liquid. If you want your money back, these funds process your request within one working day

E. Tax Saving Funds

These funds are like team savings plans that mostly invest in company stuff. The cool part is, you can save on taxes with them under Section 80C of the Income Tax Act. But, you have to keep your money in for at least three years.

F. Capital Protection Funds

These funds are like money jars where some go into safe things, and the rest into more adventurous stuff. This way, you protect most of your money from getting lost. But, just so you know, the money you make is taxed.

G. Fixed Maturity Funds

These funds are like piggy banks that put money into loans that end when the piggy bank does. For example, a three-year piggy bank will invest in loans that last three years or less.

3. On the basis of risk

Investors can pick mutual funds based on how much risk they’re comfortable with. Very-low-risk and low-risk funds are like short-term savings plans that try to protect against market ups and downs. But, because of this, they don’t make a lot of money. Medium-risk funds, such as hybrid funds, put some money in safe things like loans to balance the risk, while high-risk funds invest more in stocks. Usually, the higher the risk, the chance of making more money. Every mutual fund has to show how much risk it has with a risk-o-meter, so investors can see if it matches their comfort level.

Why people should invest in mutual funds

1. Diverse portfolio

The main advantage of putting money in a mutual fund is that you get a mix of different stocks or fixed income stuff. When you invest in a mutual fund, you’re basically getting a bunch of stocks in one go for the same amount of money.

2. Professional Management

One great thing about mutual funds is that they’re handled by an expert. The person investing might not have much time or in-depth knowledge about different investments, but the fund manager knows all about it. The manager keeps a close eye on the investments and adjusts them as needed to meet the goals of the fund.

3. Risk Diversification

Another advantage of investing in mutual funds is that your money spreads across different things like stocks, loans, and gold. This helps lower the risk, so you’re not putting all your money in one place. If one thing in the mutual fund isn’t doing well, the others might still be okay or even make more money.

4. Affordability

Investment in mutual funds are affordable. For many investors, it could be more costly to directly purchase all of the individual securities held by a single mutual fund.

5. Liquidity

You can easily get your money from open-ended mutual funds whenever you need it, on any business day when markets are open. After you ask for your money back, it usually goes into your bank account within one to three days, depending on the type of scheme

6. Low cost and tax benefit

One big plus of mutual funds is they don’t cost much. Because they handle a lot of money, the expenses are low. The expense ratio shows how much of the fund’s daily money goes to running it. Investing up to ₹1,50,000 in ELSS can get you a tax benefit under section 80C. Also, if you keep your money in mutual funds for a long time, you can save on taxes.

Conclusion

In summary, mutual funds offer a convenient and cost-effective way for investors to diversify their portfolios. With easy redemption options and potential tax benefits, investors can tailor their choices to match their financial goals. Understanding fund types, including equity, debt, and specialized funds, empowers investors to align with their preferences. Whether stability, income, or growth is the aim, a suitable mutual fund type exists to meet individual objectives.

Read more: Building a Solid Financial Future: Smart Strategies for Investing and Reaping the Rewards


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