Mutual Fund – Concept, Types, Investment Structure, Benefits, Compatibility & moreLast Updated Date: Nov 19, 2022
Know everything about Mutual Fund here. Find details like its concept, Investment Idea, Types of Funds, How does it work, Benefits, who should invest in it & more.
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About Mutual Fund
Considering how investors are in a lookout for Mutual Funds and related investment details, we have cleanly crafted this introduction on Mutual Funds article.
Let’s assume you want to invest a small amount of money but don’t have the required time to manage it.
What if you could utilize the benefits of a professional money manager with only a small investment? Well, that’s what the services of MFs are for.
A mutual fund is simply a small pool of money from several investors who want to invest their money. They can do it in several securities like stocks, bonds, debentures, and other assets.
An Asset Management Company (AMC) or professional fund managers are responsible for handling these investments of people.
In the current banking world, mutual funds have become one of the most popular forms of investment for investors globally.
The fund manager purchases or invests in numerous securities with the specified investment objective of increasing the number of profits for the investors.
Each shareholder is an equal participant in the gains and losses of the MF. The success of a fund also depends on the underlying assets.
Mutual Fund – An Investment Type
It is an investment type in which people invest money which will earn them returns on the money after a period.
It is a financial investment in which the investment is done with a lot of money gathered from the investors.
A professional portfolio manager or a fund manager is responsible for the management of the funds invested by the people.
It is the job of a portfolio manager or a fund manager to invest the money on various securities such as stocks, gold, bonds, or any other assets and help them gain the best returns as per their investment.
The investors share the profits made by the investment concerning the contribution done by them on the funds.
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Types of Mutual Funds
There are several kinds of mutual funds available in the market, depending upon the kind of securities they target.
Generally, there is a fund for almost every type of investor in the banking sector. The different types of MFs include:
One of the most popular and common mutual fund schemes available in the market are equity funds.
They allow the possibility of offering the highest amount of returns, depending on the market movements, geopolitical, and economic factors.
The main objective of equity funds is to increase faster than the fixed-income funds. Hence, there’s a greater risk that investors can lose their money.
Within the group of equity funds, there are various sub-categories. Equity funds like Small-Cap funds, Mid-Cap funds, and Large-Cap funds allow investments.
It happens to depend upon the different sizes of the company an investor chooses to invest in. Index funds allow investors to invest in equity mutual funds.
They do so without depending on a professional fund manager at the same time. Sector or thematic funds allow investments in equity-linked instruments in a particular sector of the industry.
Equity-Linked Savings Scheme (ELSS) offers the investors to claim tax deductions up to Rs. 1.5 lakh per annum.
Also known as fixed-income funds, debt MFs majorly invest in debt, money market, and other fixed-income instruments.
The performance of these funds is not influenced much by market fluctuations. These are ideal for investors looking for a low-risk investment.
The returns produced by this type of mutual fund are very much predictable, but they are subject to credit risk.
There are several sub-categories present in the debt funds also. Depending upon the maturation time of these funds, they are Short-Term and Ultra-Short Term debt funds and Income funds.
Liquid funds allow opportunities to invest in assets and securities that can mature in just 91 days.
Depending upon the level of government securities (high-rated or low-rated), Gift funds and Credit Opportunities funds are also available.
Fixed Maturity Plans allow investments in fixed-income securities like government bonds. Generally, one can invest in FMPs only during a fund offer period.
A balanced fund or hybrid mutual fund is a type of fund scheme that allows the division of investments between equity and debt.
The allocation of this type of MF may keep changing depending on market fluctuations and risks.
The main objective of balanced funds is to stabilize the risk-reward ratio by splitting money among different types of investments.
In other words, they are usually riskier than fixed-income funds. However, they tend to offer lower risk as compared to pure equity funds.
Balanced funds are ideal for investors who are looking to receive moderate funds with low risk.
There are numerous types of balanced funds an investor can invest in. There are Equity-Oriented and Debt-Oriented Hybrid funds that allocate 65% of the investments.
They are from equities, fixed-income instruments, treasury bills, and government securities, depending upon the type of fund.
Monthly Income Plans usually aim at providing steady returns over time while investing in debt instruments.
One also gets the opportunity to decide if he/she would like to receive the dividends. It could be on a monthly, quarterly, or annual basis.
Arbitrage funds aim at maximizing returns while purchasing securities at low prices. Then, it focuses on selling them in another market with huge profits.
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How does Mutual Fund or MF Work?
One can say that a mutual fund is both an investment as well as a whole company. Principally, a sponsor (promoter of a company) establishes a trust.
Under this, the trustees of the MF can hold their properties. An official custodian is responsible for overseeing all the securities and schemes of the trust.
This trust will then advertise its schemes and plans through the medium of print and electronic media to attract investors.
A Fund Manager then collects all the money and invests it as per the requirements of the investors.
The task of a fund manager includes buying shares or investing in deposits depending on the type of MF.
As markets change constantly, the fund’s assets will also change with the corresponding units. If the value of securities increases over time, then the fund has a capital gain.
Before investing in a mutual fund, a company has to verify certain details of an investor. These details include the identity, address, and bank account information of an investor.
This whole process of legal verification is called Know Your Customer (KYC). Every company in the field of finance follows the KYC process to protect itself from illegal activities and fraud investors.
Generally, most MFs are a part of much larger companies. They provide hundreds of separate mutual funds to their investors.
Also, unlike stock markets, one does not need to wait for a particular time to invest in mutual funds. An investor can easily invest in MFs whenever he/she feels like.
Benefits of Mutual Fund investment
Whether an investment is done for the short term or long term there are bound to be some advantages.
Most of the investments are being done on mutual funds because of risk management. The returns of the investment done on mutual funds change.
It depends on the results of the investment securities the investor has decided to buy. Not only this, but the market condition also affect the value of the investment security purchased.
There are some risks associated with investing in MFs. The returns are significantly greater than any other investment plans.
Following are some of the advantages of MFs that attract a lot of investors:
The main attractive feature of mutual funds is that the investors can retrieve the units at any point. This is not the case in fixed deposits.
Though the investment can be retrieved at any point, some factors are affecting the returns such as pre-exit penalty and the exit load.
Diversification: the worth of investment might not rise or fall back to back. When the worth of an investment increases, the worth of another could be on the fall.
Since mutual funds do the investment after studying the portfolio of the company properly it has a lesser chance of being volatile.
There is diversification on the investment on MFs, it reduces the risk of an investor of losing money.
Even if there is a downfall in some securities, the other securities help in safeguarding the investor’s investment.
A beginner might not have much knowledge on the working. He might not have the information as to where and how much to invest.
To help these people, there are many experts who are managing some portfolios. They help in the smooth operation of the MFs.
These experts gather money from many investors. Then, they invest in various securities and help the investors get the maximum profit from the investment.
The expert regularly monitors the entry and exit time of all the challenges. The experts do the hard thing of finding optimal security for the investors.
This is one of the biggest advantages of investing in mutual funds.
Freedom to invest in small amounts
Investors do not need to save huge amounts of money and then invest in a mutual fund. The investment can be done according to the cash flow of the investor.
If a person receives a fixed amount of salary, with the help of the Systematic Investment Plan the investment can be done on a monthly or a quarterly basis.
Availability of mutual funds
A person can buy mutual funds from anywhere and can start the investment process. This makes investing in MFs universally and easily available.
Plan for every financial amount
The minimum amount for investment in mutual funds can be as low as Rs.500. The maximum can be the amount the investor can invest.
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Who should Invest in Mutual Fund?
Whether or not you are in the finance and banking sector, it doesn’t matter. Anyone can easily invest in a mutual fund.
Every person who has a short-time or a long-term financial goal should consider investing in mutual funds.
There are numerous MFs available to suit the various needs of different types of investors.
For example, a person can even start investing with just an investment as little as Rs.500.
Then, as markets fluctuate, this investment will bring profits or losses depending on the level of risk of the investment.
While investing in MFs, every person should consider the main objective of the investment. Ask yourself if your investment plans are in line with your short/long-term goals.
One should also remember to check the past performance of a company and its fund manager before investing.
Markets change regularly, and therefore, by investing in mutual funds, anyone can accomplish their financial goals much faster.
Conclusion – Mutual Funds
Depending upon the type and risk associated with a mutual fund, an investor can enjoy numerous benefits.
MF shares are also redeemable, which means that an investor can sell the shares back to the company at any given time.
Whether you are an investor or a fund-providing company, you need to aware of all the risks and frauds related to this field.
There are several ways to recognize a fraud organization or a user that can help you avoid huge money losses. Always remember to research about the particular company before investing.
Unsolicited offers with attractive promises like ‘Guaranteed returns’ are usually a scam. A mutual fund is a risky business. But the level of this risk may vary according to the different types of funds.
The KYC is a must for all finance companies, and authorized compliance officers should be present to keep with the government regulations.
In conclusion, investing in MFs can help you to save money and even gain a huge amount of profit. Be sure to check all the necessary details before investing in MFs.
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