You must often stumble across the term mutual funds. Do you wonder what is a mutual fund? Well, look no more. This articles aims to cover the basics about mutual funds such as what is a mutual fund, types of mutual funds, benefits of investing in mutual funds, and how to invest in mutual funds.
What is a mutual fund?
Mutual funds are investment vehicles that consists of a portfolio of several asset classes such as bonds, stocks, real estate, money market instruments, cash and cash equivalents, etc. The fund manager pools the money of several investors and invests in these securities.
Types of mutual funds
Based on asset class, mutual funds are divided into three types:
- Equity mutual funds – Also known as growth funds, equity funds invest more than 60% of their total assets in equity shares of companies as per SEBI’s (Securities and Exchange Board of India) categorization
- Debt mutual funds – Also known as bond funds or fixed-income funds, debt funds invest the majority of their portfolio in fixed-income securities such as corporate debt securities, government securities (g-secs), corporate bonds, money market instruments, government bonds, etc.
- Hybrid mutual funds or balanced funds – Hybrid funds invest in more than one type of asset classes, usually debt and equities.
Based on structure, mutual funds are divided into the following types:
- Open-ended mutual funds – Open-ended mutual funds are a type of mutual funds that can issue unlimited shares. Thus, an investor can purchase ‘n’ of shares on any working day at the prevailing NAV (net asset value) of the scheme.
- Close ended mutual funds – Under close-ended funds, units of a mutual funds are bought during the NFO (New Fund Offer) at NAV of the mutual fund. Post this, no investor can subscribe or sell their mutual fund units.
Benefits of investing in mutual funds
Following are some of the advantages of investing in mutual funds:
- Mutual funds help to diversify an investor’s investment portfolio.
- Mutual funds help to lower the tax outgo with the help of tax saving mutual funds or ELSS mutual funds that are eligible for a tax deduction of up to Rs 1.5 lac per annum.
- Ideal for investors who do not have the much-needed time and resources to study and understand the markets, mutual funds provide professional management to investors.
- Mutual funds are very transparent in nature as they are heavily regulated by the Securities and Exchange Board of India (SEBI).
- Mutual funds allow investors to invest small, insignificant amounts at regular intervals with the process of SIP investment. SIP or Systematic Investment Plan, thus, inculcates financial discipline among investors.
How to invest in mutual funds?
An investor has the option to invest in mutual funds either through the traditional offline way of investing or they can invest in mutual funds online from the comfort of your home. Thanks to advanced technology, investing in mutual funds will not take a huge amount of your time or efforts. You just need to submit certain documents such as PAN (permanent account number) details, bank details, etc. Next, you need to complete the KYC (know your customer) formalities, and submit a copy of cancelled cheque.
If you wish to calculate returns on mutual funds, you can use an investment tool known as mutual fund calculator. A mutual fund return calculator offers investors with an approximate future value of their mutual fund investments. Use this tool to your disposal and plan your investments carefully. Happy investing!