A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio.
Mutual funds are a popular choice among
investors because they generally offer the following features:
1. Professional Management
-The fund managers do the research for you. They select the securities and
monitor the performance.
2. Diversification -“Don’t
put all your eggs in one basket.” Mutual funds typically invest in a range of
companies and industries. This helps to lower your risk if one company fails.
3. Affordability -Most mutual funds set a relatively low rupee amount
for initial investment and subsequent purchases.
4. Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV).
As investment goals vary from person to
person – post-retirement expenses, money for children’s education or marriage,
house purchase, etc. – the investment products required to achieve these goals
too vary. Mutual funds provide certain distinct advantages over investing in
individual securities. Mutual funds offer multiple choices for investment
across equity shares, corporate bonds, government securities, and money market
instruments, providing an excellent avenue for retail investors to participate
and benefit from the uptrends in capital markets. The main advantages are that
you can invest in a variety of securities for a relatively low cost and leave
the investment decisions to a professional manager.
Funds based on Investment Goals
You can also choose a fund based on your
Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds. These funds can be an attractive option for investors seeking high returns over a long period.
Tax-saving Funds (ELSS):
Equity-linked saving schemes are mutual
funds that invest mostly in company securities. However, they qualify for tax
deductions under Section 80C of the Income Tax Act. They have a minimum investment
horizon of three years.
Some funds can be categorized based on how
liquid the investments are. Ultra-short-term and liquid funds are ideal
for short-term goals, while schemes like retirement funds have longer lock-in periods.
These funds invest partially in fixed
income instruments and the rest into equities. This could ensure capital
protection, i.e., minimal loss, if any. However, returns are taxable.
Fixed-maturity funds (FMF):
These funds route money into debt market
instruments, which have either the same or a similar maturity period as the
fund itself. For instance, a three-year FMF will invest in securities with a maturity
of three years or lower.
Pension funds invest with the idea of providing regular returns after a long period of investment. They are usually hybrid funds that give low but have potential to provide steady returns in future.