what are mutual fund & types of mutual fund

Mutual Funds: What are they & Types of Mutual Funds

The mutual funds are professionally managed investment funds where money collects to form a large number of investors and invests in bonds, stock, and securities. These investors are maybe an institution or retail investor.

All the Mutual Funds are registered with SEBI (Securities and Exchange Board of India) that regulates the security market. So, it is quite safe. Actually, investing in mutual funds is the easiest way to grow your wealth.

what is mutual fund
What is Mutual Fund?

Let’s simplify the idea of the mutual fund. You can consider Mutual funds as a basket of investments. Each of the baskets holds dozens or hundreds of securities, stocks or bonds. So, when you buy a mutual fund, you are buying one share of this basket of investment and participate in gains or losses of all the companies in that fund.

Read also:Difference between Mutual Fund and Stock Market Investment

Types of Mutual Funds in India

Different types of mutual funds are available in the Indian market. These mutual funds are categorized on the basis of asset class, structure and investment objective.

Types of Mutual Funds based on Asset Class

1. Money Market Funds

These types of funds consist of safe short-term debt instruments. Mostly, government bonds, treasury bills, bankers’ acceptances, commercial paper, certificates of deposit etc.

So, this is a safe place to park your money. These are a safer investment, but with a lower potential return than other types of mutual funds.

2. Equity Funds

Equity funds invest in stocks or shares. These types of funds aim to grow faster than money market funds or fixed income funds. Therefore, these types of funds associated a tremendous risk with a higher result.

There is a different type of equity funds are available in the market – growth stocks (which don’t usually pay dividends), income funds (which hold stocks that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, and combinations of these types.

3. Debt Funds

These funds are invested in the debt instruments, like, government bonds, company debentures, and fixed income assets.

So, debt funds are suitable for investors who are risk-averse and looking for a short investment horizon.

Types of Mutual Funds based on Asset Class

Types of Mutual Funds based on Asset Class

4. Hybrid or Balanced Funds

The main objective of these funds is to provide a balanced mixture of income, capital appreciation, and safety.

These types of funds are invested in various asset classes. Therefore, these funds consist of both equity and debt instruments. This ratio of asset class could be variable or fixed depending on the fund.

Generally, a balanced fund maintains a weighting of 60% equity and 40% fixed income.

5. Index Funds

These type of funds aim to track the performance of a specific index on the exchange. So, the value of the mutual fund will go up or down according to the index volatility.

Moreover, index funds have lower costs than other actively managed mutual funds.

6. Tax-Saving Funds

Tax-saving funds are a pretty popular mutual fund. It makes investment majorly in the equity shares. Moreover, tax-saving funds make investor eligible to claim tax deductions under the Income Tax Act.

7. Funds of Funds

Likewise, the balanced funds these types of funds try to make asset allocation and diversification easier for the investor. So, the returns of these types of funds are dependent on the overall performance of the target funds.

Types of Mutual Funds based on Structure

1. Open-Ended Funds

Open-end mutual funds are bought and sold on demand at their net asset value (NAV). Moreover, this price is calculated at the closing rate of every trading session. Here investors buy shares directly from a fund.

So, the investors have the flexibility to purchase or redeem these funds throughout the year. Most importantly, these type of funds preferred by the investors due to its high liquidity.

Mutual Funds Based on Structure

Mutual Funds Based on Structure

2. Close-Ended Funds

On the other hand, close-ended funds are listed in the stock exchanges, and it issues a fixed number of units on the exchange. 

However, these types of funds are launched to raise money and allow trading in the open market like a stock.  All the units are eligible for the redemption on a fixed maturity date.

How can you make money from Mutual Funds?

Whenever investors invest in mutual funds, their capital increase primarily from three sources:

1. Dividend payments

Whenever a mutual fund receives any dividends or interest on the securities in their portfolio, they distribute a proportional amount of that income to its investors. 

Experts always suggest reading the prospectus carefully before buying a mutual fund for dividend payments. When you are investing in the mutual fund, you may choose to receive your distributions directly or have them reinvested in the fund.

Capital Gains

Fund manager sells this security when the price increases. This is called capital gains or appreciation.

There are two types of capital gain available. One is long-term capital gains (LTCG), and another is Short-term capital gains (STCG). These capital gains are taxable. Please read this article to know more.

Read also:Capital Gain Tax – STCG & LTCG

Advantages of Mutual Funds

1. Diversification

The main advantage of mutual funds is that diversification is automatically done. A single mutual fund can invest in dozens, hundreds, or even thousands of different investment securities.

portfolio diversification onlinefarrago
Diversification

So, instead of buying individual stocks, shares, bonds, or any other investments by your own, you can outsource the task to mutual funds.

2. Professional Management

Every mutual fund has a team of expert and professional market analyst. So, the investors can save their time, the energy involved with market research and analysis must require finding quality investments.

Therefore, to ensure your hard earned money is invested in the right investment instrument, you have to choose the right mutual fund before investing.

Yes, you can be relaxed after that, but try to monitor your portfolio in regular interval. Certainly, fund managers will make the necessary changes to the portfolio whenever required.

3. Simplicity

Mutual funds are one of the easiest to understand investment instrument.

Fund managers do all the research and data collection in mutual funds. So, mutual funds require no such experience or knowledge of economics, financial statements, or financial markets to be a successful investor.

mutual funds simplicity

Therefore, you need to analyze the performance of that mutual fund company before investing and read all the terms and conditions carefully.

4. Easy Accessibility

All the mutual funds have their online portal. So, anyone can simply open an account at any preferred mutual fund company within minutes.

mutual fund accessibility

Mutual funds are also very flexible investment option. So, you can buy, sell, increase or decrease investments in different funds just by a mouse click.

5. Liquidity

Mutual funds are considered a very liquid asset due to its high demand. So, you can redeem your invested capital at any time.

There is no need to justify your decision or search for a buyer. Therefore, just set a request with your fund house, and get the money credited to your account in 2-3 working days.

6. Affordability & Low Cost

Above all, most of the mutual funds have minimum initial investment requirements of $3,000 or less. So, anyone can start an investment anytime.

All the fund houses charge a nominal fee, called expense ratio. This expense ratio is in the range of 0.5% to 1.5%, and it cannot exceed 2.5% as per SEBI regulations.

These fund houses deduct the expense ratio from your invested capital. In this way, investors bear the transactional expenses proportionately.

7. TaxEfficiency

Mutual fund (ELSS) generated superior returns compared to the more traditional 80-C options like FD, PF etc.

However, all mutual fund schemes do not offer tax savings benefits. So, investors need to confirm carefully about the schemes from the fund managers before investing.

mutual funds tax eeiciency

Here all the tax saving ELSS funds with a lock-in of three years qualify as tax saving mutual funds. Most importantly, tax saving benefit for mutual fund investment is both in the form of tax deduction benefit and tax exemption benefit.

8. Safe and Transparent

Every mutual fund companies are must be registered under SEBI and they need to make necessary disclosures. So, mutual fund Investments are very transparent and safe.

mutual fund is safe

Most importantly, every asset management companies mandatorily disclose mutual fund product plans to the public periodically. Also, they publish performance data of the mutual fund product offers on standard parameters like risk, return, NAV, growth, portfolio composition and other important information on their portal.

Read also:Direct Mutual Fund – Everything You Need To Know

Disadvantages of Mutual Funds

Mutual funds also have some disadvantages which are also necessary to analysis before you start investing.

1. Fluctuating returns:

Mutual funds have no insurance or any guarantee of success. Also, it consists of a wide range of price fluctuations. So, you must be prepared for any depreciation in the value of the mutual fund.

2. No Control of Investors

The fund managers have managed all types of mutual funds. Only fund managers can take all kinds of investment related decisions. Consequently, being an investor, you do not have any control over your investment.

3. Fees and Expenses: 

Above all, the value of a mutual fund fluctuates depending on the changing market conditions and global issues. So, there are fees and other expenses that you have to pay.

Some mutual fund companies charge an exit cost as well when an investor chooses to exit from a mutual fund.

4. Dilution

This is the most prominent of all the disadvantages of a mutual fund. While diversification saves you from suffering any significant losses, likewise it also prevents you from making any significant gains. Therefore, major gains get diluted.

This is exactly why market experts recommended not investing in too many mutual funds. However mutual funds are themselves diversifying investments. So, buying many mutual funds also can dilute your gains.

How to Know Best Performing Mutual Funds in India?

There is a wide range of mutual funds available in India. All these funds are available online. So, before start investing you can research on your own. Moreover, all these mutual funds have different ratings & rankings. Now, you can choose a suitable mutual fund option according to your financial goal.

These are some websites where you can find your suitable mutual fund and start investing.

To sum up, this is all about the basic concept of the mutual fund. In the coming article, I will describe more about the mutual fund.

So, if you have any queries or suggestions regarding this post, please feel free to comment below. Keep in touch with onlinefarrago.

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