Mutual Funds have emerged as a popular channel for investing over the past few years. Young investors are drawn towards it as MFs give them requisite exposure to different sectors. An average investor can expect to have a diversified portfolio, managed by a hired professional. At the same time, the investor is not required to choose a particular stock himself.
However, before you start investing your money into Mutual Funds, here are a few basics you should keep in mind:
Types of Mutual Funds
Mutual Funds are classified on the basis of on their structure and investment objective.
Open-Ended Mutual Funds
A MF open for subscription throughout the year is termed as an open-ended fund. An investor can buy and sell MFunits any time as per the net asset value (NAV). Also, these funds do not have a fixed maturity period.
Closed-Ended Mutual Funds
On the other hand, a Mutual Fund that is not open for subscription throughout the year is called a close-ended fund. An investor can invest in such funds only during the new fund offer (NFO). Later, they can buy and sell units after the fund is listed on the Bombay Stock Exchange (BSE).
Investment objective of Mutual Funds
Growth Mutual Funds
People who want to invest their money for a longer period of time should ideally invest in growth funds. These funds aim to provide capital appreciation over medium to long term.
Income Mutual Funds
For people who wish to invest in Mutual Funds that would promise to give them a regular source of income, income MFs is a viable option. These schemes invest in fixed income securities such as bonds and government securities and are generally considered to be low on risk.
Balanced Mutual Funds
Balanced MFs give adequate weightage to both growth and regular income funds. These funds are best suited for investors who look for regular income through funds and willing to invest a part of their capital in growth funds.
Mutual Fund offerings
Growth Option in Mutual Funds
Under this category, all profits made are invested back into the scheme. As a result, an investor gets returns only when he or she sells units determined by the net asset value (NAV) of the scheme, and does not receive any intermediate payments in the form of bonus and dividends. The obvious benefit of this scheme is that for an investor, the NAV of the fund increases over a period of time which helps in capital appreciation.
Dividend Option in Mutual Funds
Under the dividend option, an investor receives regular payments at periodic intervals in the form of a dividend. This is how the scheme works: Whenever the NAV of a fund reaches a certain level, the profit is distributed to its investors as dividend. Hence, the NAV of the fund does not change drastically at the time of selling the units. Also, the power of compounding is less in the dividend option.