Mutual Funds have become pretty popular over the last few years. What was once just another obscure financial instrument is now a part of our lives and here to stay. According to sources, more than 80 million people, or one half of the households invest in Mutual Funds.
It's common knowledge that investing in mutual funds is better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends.
What are Mutual Funds?
Simply put Mutual Fund pools together money from many investors (having common financial goal) just like you to make up a large sum. The money collected is invested in various financial securities.
As an investor, you are issued units in proportion to the money you have invested.
The flow chart below describes broadly the working of a mutual fund:
Mutual Fund schemes may be classified on the basis of their structure and their investment objective.
Income Funds: The aim here is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, debentures and Government securities. Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited,
- By structure
- Open-ended Funds: is one that is available for subscription all through the year. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices.
- Close-ended Funds:has a stipulated opening and maturity period.
- By investment objective
- Growth Funds: The aim here is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time.
- though risks are typically lower than that in a growth fund.
- Balanced Funds: The aim here is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities. Balanced 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 Funds: The aim here is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.
Advantages of Mutual Fund:
- Limited risk: Mutual funds are diversification in action and hence do not rely on the performance of a single entity
- Easy investing: You can invest in mutual fund with as little as Rs.5000. Salaried individuals also have the option of investing a little every month in a SIP or Systematic Investment Plan
- Convenience: You can invest directly with a fund house, or through your financial adviser, or even over the internet.
- Transparency - Prices of open ended Mutual Funds are declared daily. Regular updates on the value of your investment are available. The portfolio is also disclosed regularly with the fund manager's investment strategy and outlook
- Tax efficiency - Mutual Fund offers a variety of tax benefits. Please visit the tax corner section or consult your tax advisor for details