A mutual fund
is an investment fund managed by professionals wherein the money pooled by the investors is used to purchase securities. A small fee is charged by the fund managers for this purpose.
It is a viable option for investors who lack knowledge of the stock market or cannot devote time to study the same. Thus, the fund manager takes essential investment decisions on your behalf.
For an investor, mutual funds
offer a number of benefits. You are not required to constantly monitor your investments. Further, you can give one time instructions to your bank to debit a particular amount each month via SIP (Systematic Investment Plan). You can start a mutual fund even with an investment of Rs500 via SIPs, making it an ideal investment for all income groups.
How does a mutual fund work?
Mutual funds are an investment vehicle that invest in securities such as stocks, bonds, money market instruments, etc. It has a properly structured portfolio designed by expert fund managers in order to match with the predefined investment objectives and goals.
In order to disperse the potential risk quotient, mutual funds tend to have broader portfolios. This protective measure comes to your aid in case the stocks your fund manager has invested in are going through a rough patch. For instance, fund managers invest across a wide spectrum of companies, large cap, mid cap or small cap, depending upon the mandate of the scheme you have invested in. Thus, risk is diversified to design a portfolio to give higher returns.
Systematic Investment Plan (SIP) is a plan where you invest in mutual funds by contributing a fixed amount to a predefined portfolio every month. It works on the principle of Rupee Cost Averaging, keeping your money safe against the Net Asset Value fluctuations. Systematic Transfer Plan (STP) is a plan where you can transfer your funds systematically from one portfolio to another. This can be very helpful in switching the gear from one kind of portfolio to another based on changes in your financial goals and requirements.
Systematic Withdrawal Plan (SWP) is a withdrawal plan where you can withdraw a fixed or variable amount from the mutual fund scheme on a preset date at regular intervals. It ensures that fixed cash inflow at regular intervals is maintained, making it ideal for retirement planning.
Types of mutual funds
Based on the types of securities where the funds are invested, mutual funds can be classified as follows:
Equity mutual funds: These mutual funds invest in stocks.
Debt mutual funds: These mutual funds invest in fixed income securities such as government bonds, treasury bills, etc.
Hybrid income funds: These are a mix of equity and debt mutual funds, as per the mandate of the scheme.
Index Funds: These funds track the performance of a specific index and the values go up or down accordingly.
Mutual funds are a popular investment avenue among investors, as they are easy to invest in and give higher returns as compared to other traditional asset classes such as FDs or saving bank deposits. At the same time, portfolio diversification techniques as well as availability of the options of SIP, STP and SWP make them a viable investment instrument. Further, you are not required to proactively monitor your stocks, as your fund manager does the task for you. As a result, mutual funds have become a much sought after investment avenue today with record investments in the recent months. If you have still not invested in mutual funds, make your investments soon. Happy investing!