A brief overview of the Mutual funds and its importance today
New Delhi : We have heard about Mutual funds from many different sources, like television, from people, newspapers, the internet, and many other sources. These advertisements encourage to invest in Mutual Funds but do not exactly understand what it is and how this works.
What is Mutual Fund?
Mutual Fund is a type of investment platform through which a large number of potential investors can pool their money to earn desired returns on the invested sum over a period of time. This capital amount that these investors contribute is managed by an investment professional termed as the Fund Manager of Mutual Funds. The Mutual funds manager's job is to analyse different securities like shares, bonds, gold, and debentures, others to select and create the appropriate portfolio. The gains or losses from the mutual funds investment portfolio are apportioned between the mutual funds unit holder.
Types of Mutual funds
There can be many factors on which mutual funds can be categorized into different types on the basis of different criteria. Mutual funds can be categorized on the basis of assets class, or the fund structure, or even investment objective.
Mutual funds type based on asset class:
1. Debt Mutual Funds- Debt funds are relatively less risky type of mutual funds that offer not high but reasonable return to the investors. Such type of funds can also be called fixed-income funds. Some of the assets in this type of mutual funds are corporate bonds and government securities. A mutual funds investor who is risk-averse and wants steady income can look for this security.
2. Equity Mutual Funds- As the name suggests, the mutual funds manager invests the sum into the stocks. These mutual funds are directly linked to the share market, because of which they are highly risky. These types of mutual funds are suitable for investors planning to hold the investment for long-term purposes, as with time, it can lead to huge capital appreciation.
3. Hybrid Mutual Funds- This is a mix of both debt and equity mutual funds. The fund manager has to carefully allocate the corpus among the debt and equity, considering different factors in their mind.
Mutual funds type based on structure:
1. Open-ended mutual funds- These types of funds are highly liquid and are open to trade any business day or working day. The investor can easily buy or sell the units of these mutual funds at the Spot Net Asset Value (NAV). Hence investors can redeem the units of these Mutual funds at a given time.
2. Close-ended mutual funds- Unlike open-ended mutual funds, the close-ended ones have a fixed maturity period and hence can be bought only within the given time, that is, the launch period, and can also be redeemed after the maturity period.
Mutual funds based on investment objectives:
These are the most popular type opted for classification of the mutual funds.
1. Growth funds- Capital appreciation is the ultimate goal of these funds, which is the reason the major portion of its corpus is invested in the stocks. Since it is a kind of equity fund, it has a relatively higher risk as compared to the debt funds, thus making it suitable for investors willing to take risk. These funds are suitable for long-term goals and not for the short-term.
2. Liquid funds- These mutual funds put amount in the money market instruments for the short term like the treasury bills, commercial papers, the certificate of deposits, and many other short-term instruments. Investors look for this fund when they wish to park in their surplus funds for only a few days or few months.
3. Income Funds- These funds help providing investors with a stable income for themselves. Income funds can be suitable for short-term as well as for long-term investment purposes. These are a type of debt funds, investing majorly in government-issued securities or bonds.
4. Tax saving funds- These funds help you in tax saving by providing deduction under section 80C of the Income Tax Act, 1961. The invested amount under these mutual funds is allowed as deduction within the claim of up to ₹1.5 lakhs. ELSS is one of the most sought-after schemes under this type of fund.
Top Mutual Funds
Investors should make a wise decision while choosing the mutual fund they wish to invest in, whether they want to invest lumpsum or SIPs, what amount they want to invest, how much risk can they bear, and many other aspects as well. Everyone has different requirements; you cannot invest in a similar mutual fund like your friends or family just because they have invested in it. Consult a mutual fund consultant about the kind of mutual fund that is the most suitable for you and begin your journey of investing.