Mutual Funds Meaning

A Complete Guide to Mutual Fund

Why Mutual Funds are more secured investment option when compared to other options. If you are looking to invest in mutual funds then keep reading different types of mutual funds to understand all things about it. A mutual fund denotes to a form of the investment process. This form of investment allows individuals to share with hundreds and thousands of other people. The individual and the companion are referred as investors. The individual who administers this investment is referred to as the professional fund manager. The fund manager has attained years of experience in supervising investments. In addition, he or she is supported by a team of research and analysis experts. The team administers this investment procedure for investors. Mutual funds refer to the accumulation of the money invested mutually by different investors. The money collected money from the fund is organized jointly to earn the maximum achievable returns. Investment in a mutual fund allows increasing the value of the invested money. This days many Mutual Fund Startups have emerged providing consultancy services.

Advantages and benefits of investing in mutual funds:

Proficient money administration:

A mutual fund company utilizes qualified managers to administer the money devoted to their funds. The fund manager along with his or her team determines where to invest the money. This includes the sectors, stocks or the specific debt papers or a place where the money will be kept in cash. They have the facts and information relevant to the economic world. Hence, they can make expert calls on behalf of the individual.

Low cost:

The charge set by mutual fund companies is a nominal fee to direct the money to other individuals. This fee is referred as the fund’s expense ratio. The annual expense ratio of a mutual fund may not reach beyond 2.5%. This is referred to as an upper limit of a fund’s management fees. The majority of the mutual funds have an expense ratio that stretches from 0.5% to 1.5%. Direct plans of mutual funds contain an inferior expense ratio in contrast to regular plans. It is not necessary to pay this management fee separately since it is with held from the money invested by the investor.

Convenience:

It is trouble-free to invest in a mutual fund. In contrast to earlier procedures, now the process is completely paperless and conducted online. A number of investment platforms assist in the completion of the investment process in a few minutes. It is not mandatory to sign physical documents or cheque in order to invest in a mutual fund any longer.

Diversification:

On investment in a mutual fund, an individual gets an opportunity to invest in diverse stocks or papers for an insignificant amount. In case of direct stock investments, a big amount is required to invest across diverse sectors as well as companies. However, in case of mutual funds, this diversification can be accomplished even with an investment as trivial as Rs 500. More importantly, the advantage of diversification is that the loss of one company or short fall in one sector will not reflect on the investments. Diversification permits an individual to diminish the chances of risk.

Systematic investments:

According to most investment expert, the best way to invest in mutual funds by means of equity mutual funds is through SIPs. A SIP refers to a systematic investment plan. It is a method to invest analytically in a mutual fund. When a SIP is initiated, the mutual fund has to be given a directive to deduct a fixed amount intermittently from the bank account. This is beneficial since the entity develops the habit of investing at different levels of the equity markets.

Flexibility:

Other than tax-saving mutual funds or ELSS funds, there are no other mutual funds with a lock-in period. Investments here are entirely accommodating. An individual may invest whenever deemed fit, cash in, redeem to some extent and even suspend the investments. In addition, one may discontinue investing in a fund and initiate investing in a different fund. Thus, various options are available as per the person’s convenience. In case of ELSS funds, the low lock-in period is for only 3 years.

Liquidity:

Mutual funds are entirely referred as liquid investments. One may redeem the invested money at any moment, without any further complications. There is no reason to give a reason to cash in the investments and there is no need to search for a buyer. The only process that is necessary involves placement of a request with the mutual fund company in order to get back the money in the bank account within a couple of working days. In case you are worried about the GST impact on Mutual Funds then you should read this Impact analysis by economic times.

Different types of mutual funds:

Mutual funds can be largely categorized into three types on the basis of the asset classes they invest in. Equity and debt are the principal asset classes that mutual funds deposit their collected funds in the following are the three main types of mutual funds present at the moment:

Equity funds:

Majorly, equity mutual funds invest in stocks and another equity-related medium. These funds procure the company shares that are publicly programmed on stock exchanges namely- BSE and NSE. However, equity funds contain equity-related risks, though they are not as risky as investing directly in stocks. The reason behind this is that equity funds expand their range across various sectors as well as stocks. In addition, equity funds invest a tiny fraction of their portfolio in debt mechanism and may even retain cash, in case the fund manager fails to recognize any good buying openings.

Debt funds:

In case of debt mutual funds, investments are made in fixed income mechanism such as corporate bonds, treasury bills, government securities, money market instruments and so on. A debt fund is not as volatile as an equity fund; however, lesser returns will be earned over a period of time. Debt funds are known as fixed income funds as well, but they don’t provide guaranteed returns. Nevertheless, they deliver higher returns in contrast to fixed income investments such as fixed deposits and recurring deposits. Debt funds are comparatively tax-efficient than other alternatives for fixed income.

Hybrid funds:

These are mutual funds that invest in more than one type of asset class. There are various types of hybrid funds, which invest in equity along with debt. In addition, there are other kinds of hybrid funds as well that invest a certain fraction in gold as well. The prevalent type of hybrid fund is the balanced fund. In this fund, at least 65% of their assets in equities are invested and the rest in debt. Balanced funds are referred to as equity-oriented hybrid funds. Similarly, other types of hybrid funds are there which are debt-oriented. In conclusion, “Mutual Funds Guide”, provides details about mutual funds and provides various investment options.