What are mutual funds?
A mutual fund is a professionally-managed trust that pools the savings of many investors and invests them in securities like stocks, bonds, short-term money market instruments and commodities such as precious metals. Investors in a mutual fund have a common financial goal and their money is invested in different asset classes in accordance with the fund’s investment objective. Investments in mutual funds entail comparatively small amounts, giving retail investors the advantage of having finance professionals control their money even if it is a few thousand rupees.
A great merit of the capital market is that it enables ordinary investors to participate in the sharing of this wealth. Thus, while a few extraordinary entrepreneurs create wealth, a large number of ordinary investors participate in the sharing of that wealth. However, direct investment in the stock market requires some expertise. Most people do not have this expertise or the time for direct investment in the stock market. For them, it would be sensible to entrust their funds with experts who invest their money in good securities. This is the essence of mutual fund investment.
Mutual funds are institutions that mobilize the savings of investors and invest them in a portfolio of securities like shares, bonds, debentures, money market instruments etc.
The mutual fund industry of India is continuously evolving. Along the way, several industry bodies are also investing towards investor education. It is still considered as a high-risk option.
In fact, a basic inquiry about the types of mutual funds reveals that these are perhaps one of the most flexible, comprehensive and hassle free modes of investments that can accommodate various types of investor needs.
Various types of mutual funds categories are designed to allow investors to choose a scheme based on the risk they are willing to take, the investable amount, their goals, the investment term, etc.
Each mutual fund scheme has its own objective that determines its assets allocation and investment strategy. The securities are selected to suit the investment goals of investors. Investment goals of investors differ due to differences in age, income, family commitments, life style etc. There are different types of funds to suit the different investment goals of investors.
Equity funds invest a major part of its corpus in stocks and the investment objective of these funds is long-term capital growth. When you buy units of an equity mutual fund, you effectively become a part owner of each of the securities in your fund’s portfolio. These funds may invest in shares of wide range of industries or focus on one or more industry sectors. These types of funds are suitable for investors with a long-term outlook and higher risk appetite.
Debt/ Income funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. By investing in debt instruments, these funds provide low risk and stable income to investors with preservation of capital. These funds tend to be less volatile than equity funds and produce regular income. These funds are suitable for investors whose main objective is safety of capital with moderate growth.
Balanced funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These funds provide both stability of returns and capital appreciation to investors. These funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.
Money Market/ Liquid Funds
Money market/ Liquid funds invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for a very short term. The aim of Money Market /Liquid Funds is to provide easy liquidity, preservation of capital and moderate income. These funds are ideal for corporate and individual investors looking for moderate returns on their surplus funds.
Gilt funds invest exclusively in government securities. Although these funds carry no credit risk, they are associated with interest rate risk. These funds are safer as they invest in government securities.
ELSS (Equity Linked Savings Schemes) offers tax savings to investors. They are ideal for those looking for tax savings and investment in equity/equity linked markets. Under the current tax laws these are having a lock-in period of 3 years.
There are various other category / sub-category as well like Index funds, Sector funds, Thematic funds, Interval funds, Fixed Maturity Plans, etc.
Investors can subscribe to these funds as Lumpsum investment or even on a periodic investment basis popularly known as SIP (Systematic Investment Plan).
Mutual funds are eminently suitable for small investors. Investors can start with small amounts, say even Rs 500/- p.m. They get the advantage of expert fund management apart from liquidity and tax advantages.