Mutual funds refer to the funds generated from multiple investors. It is a pool of money where a company invests in securities and bonds. It is people’s money from which every shareholder can draw the benefits. This fund is created with multiple people contributing mutually in various assets and securities like equities, government securities, debts and other liquid assets like funds and bonds. Any kind of ups and downs in any fund like gains, rewards, risks, profits, etc. pertaining to that particular fund are shared equally among the contributors depending on their proportion or share.
How is this fund created?
An asset management company manages a fund that is registered with the Securities Exchange Board of India (SEBI). An asset management company (AMC) is approved by SEBI.
Types of Mutual funds
Mutual funds are of several types. One is based on Asset Class and the other one is based on structure. Asset class funds are distributed under the following types.
- Equity shares: Also known as ordinary shares, these funds capitalise the money in the equity shares and stocks of various companies. It involves high risk, however, a huge profit is also most likely to happen.
- Debt funds: These are the funds invested in government bonds and have assured returns. It involves low risk and assured returns to the investors.
- Money market funds: These are the types of funds invested in liquid assets like commercial papers, treasury bills, etc. This is one of the safest options for investments with the assured and fast return.
- Balanced or hybrid funds: These funds balance the risk and return by capitalising between both high risk and risk asset classes. Distributing your funds among multiple securities balances the profit and loss.
- Sector funds: These refer to the funds invested in a particular sector like banking is one sector, so the funds will only be invested in the companies related to banking sector or any instrument associated to banking. The position or performance of that particular sector will decide the returns. The risk is dependent on the sector chosen.
- Index funds: The funds that are dependent on a specific index, for example, the inflation of gold price decides your return. Higher the value of gold means the high price you get on selling, thus, resulting in profit.
- Tax saving funds: The funds invested under the tax saving scheme to get the tax benefits, under the income tax act.
- Fund of funds: Investment in other mutual funds and getting good returns if the mutual fund invested in is going up in the stock market.
Structure-based mutual funds are as follows.
Open-ended funds: Invested funds can be redeemed or encashed after purchase.
Close-ended funds: They are closed-ended as the purchased product or unit cannot be redeemed before its maturity date. It has a locking period.
Benefits of Mutual Funds
Funds are professionally managed
The funds in the asset management companies are managed by finance professionals who manage the mutual funds making it a safe investment by reducing risk and increasing returns.
With investments in multiple funds, securities and assets, the risks are distributed among all the investments, therefore, maintaining the balance between profit and loss.
The mutual fund document clearly states the assets targeted in investment. You know where you have invested your money and get the access to some of the securities that otherwise are not accessible at the time of direct investment. Your contribution to investment is well organised and planned.
Since it’s a mutual fund and the transaction is divided among multiple investors, therefore, the primary amount is really low that makes it affordable for the people with low income or who don’t wish to invest a high amount.
Multiple investment options
The investors are available with a sea of investment options like money market fund, index fund, debt funds, equity funds, sector funds and fun to funds. The wide variety helps you manage the risk and returns at the same time since there are multiple options available.
Easy sale and purchase option
In case you choose to invest in open-ended funds, it is easy to purchase funds when they are down and sell when they are high in the market, therefore, making maximum benefits and capital gains.
Investing in mutual funds can save your tax as showing mutual fund as an investment, your tax won’t be deducted.
These investments are quite beneficial as they promise assured returns. The investors must diversify their investments to manage risks and returns well.
With a detailed bank statement, an investor can track its investment amount regularly.
Government regulated management
All the investments are taken care of and regulated by SEBI (Securities Exchange Board of India), hence, it is in safe hands as SEBI is a government body.
It offers the option of systematic investment by making investors invest a small amount regularly. It is an easy option for people from all income group.
Eligibility for all
This investment has no specific eligibility criteria, almost anyone can invest in mutual funds.
How to invest?
There are several ways to invest, if you have strong knowledge about the stock market, shares and you are quite active on whereabouts of the market; you can invest directly. This can be done through the company’s web portal. You just need to fill in the respective form and submit it along with all the required documents. The form can be filled by visiting the company or online as well.
There are agents or brokers who can help you make the profitable investments. The agents are professionals well versed with the market. They help the investors with all the information about a mutual fund, form filing process to other associated issues. If you choose to invest it with the help of the agent, they charge a certain amount of fee.
Apply for Mutual funds online, it’s easy!
Things are easy and fast when you don’t have to go anywhere because everything is online.
- You can apply for mutual fund online as it is easy.
- You can evaluate and compare the funds and compare it in the market. The performance of the fund in the market can easily be checked.
- It is cheap as compared to investing through an agent as you have to a pay a certain amount to the broker. Applying and investing individually is more beneficial.
- You can decide yourself which fund fits your need as all the information is available online. Choose the best for you!
Mutual fund fee structure
The mutual fund fees have two major components. The annual fee and the shareholder’s fee. The annual fee is the operation and management fee of that particular fund, you choose to invest in. The shareholder fee is the redemption fee or any commission charges that are paid by the investors directly at the time of sale and purchase of the fund.
The annual operation fee usually ranges between 1-3% of the annual percentage of the funds. The annual management or operation fee along with its advisory fee is called the expense ratio of the fund.
All about mutual funds in few words
- Mutual funds are the pool of money created from a contribution from various investors.
- This money is used to buy securities, assets, bonds and stocks of a company.
- Every shareholder participates and is a part of profit and loss for their type of fund.
- The mutual funds are designed and managed professionally to get the maximum capital gains.
- A mutual fund is like buying a part of the company and its assets.
- A mutual fund usually contributes to the number of securities, the investors get the benefit of diversity.
- Investing in a stock and a fund of a company is different. The fund doesn’t get affected as much as the stock does. In fund you lose a certain portion, however, if the company stocks are declining, your investment is going to be in complete loss.
It is a common tagline that is stated with every mutual fund advertisement or marketing, ‘Mutual funds are subject to market risks’, therefore, it is always wise to invest smartly and have a thorough knowledge of the market, in order to make the right decision.
Also Read: IS MUTUAL FUND TAX FREE ?