Mutual Funds

Many individuals pooling in money with the sole intention of earning returns is called a mutual fund. Investing in Mutual Funds is normally much easier than buying or selling financial securities like stocks, bonds or money market instruments. Mutual funds are managed by professional ‘fund managers’ who invest the fund’s capital in various financial securities based on the objective of the fund and attempt to produce capital gains and income for the fund’s investors. These Fund Managers are highly qualified individuals who invest your money based on a lot of backend research of the fund and attempt to produce capital gains and income for the fund’s investors. As a Mutual Fund investor, you own units of a Mutual Fund but not any securities directly. All the investors of a fund share in the fund’s gains and losses proportional to the amount they’ve invested.

  1. Diversification: One of the primary goals of investment must be diversification of risk and Mutual Funds accomplish this goal well. With a single mutual fund, you invest in various assets and many corporations. If one stock or asset goes down, others may compensate for it.
  2. Expert Management: Mutual Fund managers are highly qualified and experienced professionals who are constantly researching, analyzing and managing their funds. Mutual fund companies have access to information beyond what you as an individual or a retail investor have.
  3. Liquidity: You can sell or buy mutual funds anytime. Mutual funds are good if you want to invest in an easy to liquidate instrument. Investments can be redeemed within 1-3 working days.
  4. Convenience: Mutual Fund investments are highly convenient as you can invest through various channels (Demat Account, Online Bank Investment Account, Direct through Mutual Fund houses, Mutual Fund distributors, various online investment platforms, etc.), can invest any time, can invest in very small amounts (as low as ₹500), can easily track your portfolio (through mobile apps and monthly reports), get professional management without amateur intervention, access of investment in few financial securities such as Govt. securities, which you as an individual or retail investor do not have easy direct access to.
  5. Range of Investment Options and Objectives: You can find a mutual fund that matches almost exactly what you are looking for, from an investment. This could be related to both your risk profile and your investment horizon.
Types of Mutual Funds
Based on Fund Schemes
1. Open-Ended Funds: These are funds in which you can enter or exit anytime. They are not time-bound.
2. Close Ended Funds: After the closure of an initial offer, new investors cannot enter, nor can existing investors exit till the term of the scheme ends. These funds are listed on the stock exchange and you can sell fund units on it, but liquidity is very low.
3. Interval Funds: Very few such funds are present in the Indian market. These funds combine the characteristics of both closed-end and open-ended funds. These do not permit regular buying and selling as these remain closed for most of the time but open for a time interval predefined by the fund, wherein units can be redeemed, or new units can be bought. Like Close-ended funds, these too can be traded on the stock exchange.
Based on the Management of funds
1. Actively Managed Funds: These are the funds, in which fund managers actively pick securities based on their research and analysis. These funds are compared to benchmarks which are the most popular indices.
2. Passively Managed Funds: These are funds in which fund managers replicate an index with the same stocks and in the same proportion. They are also called Index Funds or ETFs.
Based on the assets invested in Mutual funds
1. Equity Funds: Equity Funds invest their assets in the Stock market. These are also known as Stock Funds. These are the highest risk Mutual Funds.
2. Debt Funds: These types of Mutual Funds invest their assets only in Debt (Fixed Income) Instruments such as Corporate Bonds, Debentures, Govt. Securities, etc. Their overall risk profile is low.
3. Liquid Category Funds: These funds invest their assets in low maturity Money market instruments such as Treasury Bills, Certificate of Deposits, etc. which have maturities of 1 to 180 days. They are the least risky Mutual Fund type.
4. Hybrid Funds: These funds invest their money in both Equity and Debt instruments. The ratio varies from fund to fund. These funds are medium risk types and give you the best of both equity and debt funds.
Based on the Investment objective of the fund
1. Growth Funds: These are equity-based funds that invest primarily in Stock Markets. While picking stocks, these funds look for the potential to grow faster than the others. The fund managers mostly invest in stocks that have low dividend yields and high growth potential.
2. Value Funds: Value funds are that invest in undervalued stocks with a potential for appreciation, but such stocks are usually ignored by the investing community. It is a more conservative approach to investing. They invest typically in stocks with high dividend yields and low P/E ratios.
3. Income Funds: These funds invest primarily in Debt instruments and will give you regular dividends/interest and are known for capital protection.
Special Funds
1. Index Funds: Index funds closely follow the stock indices they track. For instance, a scheme that tracks Sensex will invest in the 30 stocks that comprise the benchmark index of the BSE. Type of Passively Managed Funds.
2. Sectoral/Thematic Funds: These are a type of Equity Funds, which invest their assets only in one focused sector/theme. Some popular sector funds are in Banking, Technology, Pharma and Infrastructure sector.
3. Tax Saving Funds: Also, known as ELSS, they are a type of Equity fund, which has 3 years of lock-in and your investments get tax benefit under Section 80C.
4. International Funds: These mutual funds invest in companies outside India. They help you to invest and get exposure to Global companies.
5. Retirement/Children Funds: These are solution-oriented Mutual Funds and have a 5-year lock-in.