Mutual Funds are financial instruments. These funds are collective investments which gather money from different investors to invest in stocks, short-term money market financial instruments, bonds and other securities and distribute the proceeds as dividends. The Mutual Funds in India are handled by Fund Managers, also referred as the portfolio managers. The Securities Exchange Board of India regulates the Mutual Funds in India. The unit value of the Mutual Funds in India is known as net asset value per share (NAV). The NAV is calculated on the total amount of the Mutual Funds in India, by dividing it with the number of units issued and outstanding units on daily basis.
Benefits of Investing in Mutual Funds:
Any one who is aware of stock market is not new to mutual funds. Mutual funds have gained in popularity with the investing public especially in the last two decades following are some of the primary benefits.
1. Professional Financial Experts
Every Mutual Fund scheme has a well-defined objective and behind every scheme, there is a dedicated team of financial experts working in tandem with specialized investment research team. These experts diligently and judiciously study companies, their products and performance, and after thorough analysis, they decide on the best investment option most aptly suited to achieve the scheme’s objective as well as investor’s financial goals.
2. Diversifying Risk
It plays a very big part in the success of any portfolio. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.
3. Low Cost
Mutual Funds generally provide an opportunity to invest with fewer funds as compared to other avenues in the capital market. You can invest in a mutual fund with as little as Rs. 5,000 and also have the option of investing a little of Rs.500 every month in a SIP or Systematic Investment Plan.
You can encash your money from a mutual fund on immediate basis when compared with other forms of savings like the public provident fund or National Savings Scheme. You can withdraw or redeem money at the Net Asset Value related prices in the open-end schemes. In closed-end schemes, lock in period is mentioned, investor cannot redeem his investment until that period.
5. Variety of Investment
There is no shortage of variety when investing in mutual funds. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds and with due assistance from a financial expert, the investor can choose a scheme that aptly fits his requirements, and helps him achieve maximum profitability.
Types of Mutual Funds:
1. Equity Funds
Equity funds aim to provide capital growth by investing in the shares of individual companies. Any dividends received by the fund can be reinvested by the fund manager to provide further growth or paid to investors. Both risk and returns are high but equity funds could be a good investment if you have a long-term perspective and can stay invested for at least five years.
2. Debt or Income Funds
The aim of debt or income funds is to provide you with a steady income. These funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. Opportunities for capital appreciation are limited.
3. Balanced Funds
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. The investor may wish to balance his risk between various sectors such as asset size, income or growth. Therefore the fund is a balance between various attributes desired, however, NAVs of such funds are likely to be less volatile compared to pure equity funds.
4. Liquid Funds
Liquid funds are a safe place to park your money; it is an appealing alternative to bank deposits because they aim to provide liquidity, capital preservation and slightly higher interest rates than bank accounts. Returns on these funds fluctuate much less compared to other funds as the fund manager invests in 'cash' assets such as treasury bills, certificates of deposit and commercial paper.
5. Index Funds
Index funds are passively managed funds i.e. the fund manager attempts to mirror the performance of a benchmark index like the BSE Sensex or the S&P CNX Nifty, by being invested in the same stocks. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index.