What is a Mutual Fund?
Mutual funds managed by Professional Fund Manager who make decisions which investments to buy and sell for the fund. Mutual funds offer multiple product choices for investment across the financial spectrum. A mutual fund is a portfolio of stocks, bonds, or other assets purchased with the pooled capital of investors.
Investors buy shares of the mutual fund, and their money is pooled together with money from other investors. The value of one share in a mutual fund is known as the Net Asset Value (NAV). It is calculated by dividing the total value of the fund's assets minus liabilities by the number of shares outstanding. NAV is calculated at the end of each trading day.
Mutual funds allow investors to access a diversified portfolio of securities with a relatively small investment amount.
Types of Mutual Fund
There are different types of mutual funds, each catering to different investor preferences, risk tolerances and financial goals. Here are some common types of mutual funds:
Equity funds : These invest primarily in stocks or equities with the goal of long-term capital growth. These can be further classified into large-cap, mid-cap, small-cap or sector-specific funds. Equity funds have the potential to deliver substantial returns over time. As a result, the risk associated with these funds is also relatively higher.
Debt Funds : Also known as fixed-income funds, these invest in fixed-income securities such as government bonds, corporate bonds, and other debt instruments. They focus on generating regular income with lower risk compared to equity funds. Given that investments offer a set interest rate and maturity date, this could present a good opportunity for passive investors seeking consistent income with low risk.
Balanced Funds : These invest in a mix of equity and fixed income securities to provide a balance between capital appreciation and income generation. Balanced funds, under the management of fund managers, are particularly well-suited for investors with a moderate appetite for risk who aspire to retire early.
Index funds : These replicate the performance of a specific market index, such as the S&P 500 or FTSE 100, by investing in identical securities in the same proportion as the index. Index mutual funds belong to a category of mutual funds designed to mirror or replicate the components of a market index in their portfolio construction. These funds are managed passively, resulting in low expense ratios for investors. Index funds maintain identical proportions of shares as those found in the benchmark index they track. For instance, an index fund mirroring the Nifty index will hold stocks in the exact same ratio as the Nifty index components.
Money Market Funds : These invest in short-term, low-risk securities such as treasury bills, commercial papers and certificates of deposits with the aim of providing stability and liquidity to investors. The fund manager allocates your capital and provides regular dividends in return. Selecting a short-term strategy can markedly diminish the investment risk associated with these funds.
Sector Funds : These focus on specific sectors of the economy, such as technology, healthcare, or energy, allowing investors to capitalize on opportunities within those sectors. Sector funds also offer impressive returns
Tax-saving Funds (ELSS) : Equity-linked savings schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act in India while investing primarily in equities.
Global Funds : These funds invest in securities from markets outside the investor's home country, offering diversification benefits and exposure to global economic trends.
Specialized funds : These include thematic funds that invest in specific themes or trends, such as sustainable investing, real estate, or commodities, catering to investors with specific investment preferences.
Pension funds : Pension funds: The term "pension fund" signifies a fund established to offer financial assistance to individuals during their retirement years. Usually, it consists of investments from multiple contributors and serves to offer pensions to members upon their retirement from employment. Pension Funds can manifest as mutual funds or government-supported programs. They invest and reinvest contributed funds in suitable instruments, ensuring members receive a stable income when the plan reaches maturity.
Liquid Funds : Similar to income funds, liquid funds also fall within the debt fund category, investing in debt instruments and the money market. A distinguishing aspect that sets liquid funds apart from other debt funds is the method used to calculate the Net Asset Value.
Funds of fund : This program invests in units of underlying mutual fund schemes from either the same mutual fund house or different mutual fund houses. The choice of mutual fund assets considers factors like the investor's risk profile, investment objectives, and return expectations.
Fixed maturity funds : Fixed Maturity Plans, commonly referred to as FMPs, are essentially closed-end debt schemes that invest for a specified period, offering a low-risk profile.
Aggressive Growth Fund : An Aggressive Growth Fund is a type of mutual fund that focuses on investing in high-growth companies with the potential for substantial capital appreciation over the long term. These funds typically target companies with strong growth prospects, often in sectors such as technology, healthcare, or emerging markets.
Income Funds : Income funds are mutual funds designed to provide investors with a steady income stream. These debt-based mutual funds allocate investments across a range of assets, such as certificates of deposit, government securities, money market instruments, and corporate bonds.
Capital Protection Fund : Capital Protection Funds are closed-end mutual funds that invest in a combination of debt and equity. Throughout the duration of the plan, a segment of the investment is allocated to "protect" the capital, ensuring it remains equal to the principal amount.
Hybrid funds : Hybrid funds also known as balanced funds, are a type of mutual fund that invests in a combination of both stocks (equities) and bonds (fixed-income securities) with the goal of providing investors with a diversified portfolio. Which provides capacity. Both capital appreciation and income generation.
How mutual funds work?
Mutual funds operate by pooling money from many investors to invest in a diversified portfolio of securities managed by professional fund managers. When an individual or institutional investor buys shares of a mutual fund, they effectively become the owner of a portion of the fund's assets. These pooled funds are invested in various assets, such as stocks, bonds, money market instruments or a combination of them, depending on the investment objectives of the fund.
