In simpler terms, a mutual fund is an investment scheme that pulls a group of people to invest in stocks, bonds or securities sharing a common investment objective.
It is usually run by an asset management company (AMC). The income generated from this investment scheme is then proportionately distributed amongst the investors levying certain expenses and calculating a “Net Asset Value.” This ‘Net Asset Value’ keeps fluctuating and therefore, each investor has to bear the gains or losses of the fund.
All these mutual funds come under the regulations of SEBI and have to strictly follow the provisions created by SEBI to protect the interests of the investors. Our company works with all mutual fund companies and provides end-to-end service.
Types of Mutual Funds
Open-Ended Mutual Funds and Close-Ended Mutual Funds
Investors can purchase or sell units at any time throughout the year. Also, these kinds of mutual funds do not have a fixed maturity. Open-ended mutual funds have several plans for investors – Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), and Systematic Withdrawal Plan (SWP). In the case of open-ended funds, units are purchased or sold at the NAV of the fund which fluctuates every day. Moreover, there’s no limitation on the number of units that can be purchased by any investor.
In the case of close-ended mutual funds, the purchase and sale of units are restricted and the various plans like SIP, STP and SWP are unavailable.
Advantages Of Investing In An Open-Ended Mutual Fund
Liquidity: No restriction on the investor to redeem units.
Numerous systemic features: An open-ended firm has several systemic plans like SIP, STP, and SWP.
Management: The funds are managed by professionals who have the expertise, knowledge, and resources to make the right decision for the sole benefit of the investors.
Extensive portfolio: This kind of mutual fund invests in a myriad of assets. The stocks and securities belong to different companies and industries. This reduces the risk of investment.
More and more returns: These funds are ideal in the long run as they provide higher returns as compared to other schemes.
Open-ended mutual funds are more flexible as investors can avail liquidity at any time whereas closed-end funds allow liquidity only after the maturity period is over. Also one can start with as low as Rs. 500 or 1000 but a minimum of Rs. 5000 is required to invest in closed-end funds.
Categories of Mutual Funds
Mutual Funds can further be broadly classified into the following categories –
Equity Mutual Funds
An equity fund is a kind of mutual fund that invests principally on stocks. Equity funds involve higher risks and are more suitable for long-term goals after retirement.
Equity funds can be further classified into large-cap funds, multi-cap funds, mid-cap funds, index funds, ELSS, providing investors a variety of options depending on their investment requirements.
Debt Mutual Funds
Debt mutual funds provide a steady income to investors and one can invest in fixed income securities such as treasury bills, government securities, corporate bonds or debentures, etc. The risks involved in debt mutual funds are lesser compared to equity schemes. These funds are suitable for short-term investments. They can be further classified into Dynamic Bond funds, Income funds, Liquid funds, Gilt funds, Credit Opportunities funds, etc.
Hybrid Mutual Funds
Hybrid mutual funds are a combination of both Equity and Debt instruments and investors can invest in both. Assets are modified and allocated by fund managers to reduce risk levels so as to benefit investors.
Exchange-Traded funds are traded on stock exchanges. The units of ETF are listed in the stock exchange and they can be sold only by a registered broker. Since the NAV keeps on fluctuating, its price keeps on changing too.
Why Should You Invest in a Mutual Fund?
Mutual funds are investor-friendly financial schemes and one can start with as little as Rs. 500 through SIP or Systematic Investment Plan. Another important benefit of investing in mutual funds is that investors can redeem their points at any point in time.
Mutual funds are ideal for investors who are lacking large amounts to invest or those who are naive about the financial market or its regulations.
Moreover, they are managed by expert fund managers after conducting thorough market research for the sole benefit of the investors. The expert fund managers administer money in diverse securities thereby increasing the profit margin of the investors.