What is Mutual Fund?
An investment instrument that consists of a pool of funds contributed by many investors in order to invest in stocks, bonds, and other assets. These funds are managed by Fund Managers to generate returns and capital appreciation to the investors. The gains and losses are shared by the investors as per their proportionate investment in the schemes. It is run by Asset Management Companies (AMC) who offers variety of mutual fund schemes.
Types of Mutual Funds
Equity Mutual Funds
It is invested in shares of different companies by generating 12% returns and their performance depends upon the market conditions. These are high risk funds with better returns compared to other types. Equity types are Large cap, Mid cap, Small cap, Multi cap, Flexi cap, Thematic, Sectoral, Dividend Yield, Contra, Value and ELSS (Equity Linked Savings Scheme).
Debt Mutual Funds
It is invested in securities like treasury bills, corporate bonds, government bonds, etc., which generate fixed income. They have a pre-decided maturity date and returns are not affected by market conditions. They can generate 8% returns and are considered as low risk funds with low returns compared to other types. Debt types are Liquid funds, Banking and PSU funds, Corporate Bond funds, etc.,
Hybrid Mutual Funds
It is a combination of Equity and Debt instruments and is designed to meet the investment objective of a scheme. It helps to create a balanced portfolio to its investors for regular income with capital appreciation in the long term. It can generate 10% returns which is more than debt and less than equity. So it produces more risk than Debt and less risk than Equity. Some Hybrid types are Equity oriented Hybrid, Debt oriented Hybrid, Balanced Hybrid, Aggressive Hybrid, Arbitrage, Multi Asset Allocation, etc.,
Benefits of Mutual Fund
Portfolio Diversification
Fund Management
Liquidity
Tax Efficiency
Transparency
Licensed Professionals
Choosing the Right Mutual Fund
Why Mutual Fund?
-
It beats inflation compared to other financial products.
-
The money is invested in large no. of companies which will help to grow it by minimizing the risk.
-
A Fund Manager takes care of the investments by watching the market, selecting investments and adjusting the mix continuously.
-
Mutual Funds provide two types of earnings called Capital Gains and Dividends. Instead of withdrawing, if an investor holds and reinvest it in the same scheme then he/she can benefit from compounding.
(Mutual Fund Distributors are paid by the AMCs for their services
and hence they do not charge any fee from the investors)