An Overview on Mutual Funds: Introduction, Benefits and Types
Mutual funds have become a widely common investment instrument in India, particularly among new investors. A mutual fund pools funds from several investors to invest in a variety of assets, including stocks, bonds, and other securities. This approach enables mutual funds to offer a range of benefits, which can especially be advantageous to people new to investing.
For most beginners, mutual funds can be a simple, straightforward way to diversify investments without the need for extensive market knowledge. Mutual funds provide investors with access to a professionally managed portfolio that helps mitigate individual risks while doing away with the need to make complex decisions. Keep reading to learn more about how mutual funds work, their benefits, and how to choose the right ones for your investment goals.
What Are Mutual Funds?
Mutual funds are a type of collective investment vehicle that is managed by a professional fund manager. The pooled funds are invested across multiple asset classes. This can include stocks, bonds, and other securities. Each and every investor owns units in the funds, which basically represent a portion of its holdings.
How Do Mutual Funds Work?
Mutual funds are managed by financial experts known as a fund manager. They actively manage the portfolio to achieve the fund’s investment goal. As a result, by investing in mutual funds, you can enjoy advantages like diversification and professional management without needing to select individual bonds or stocks to invest in.
Key Benefits of Investing in Mutual Funds
Mutual funds are popular not only among novice investors but are also preferred by many seasoned ones due to the many benefits they offer:
- Diversification: Mutual funds invest in an expansive range of assets. This helps lower the chances of any negative impact that may occur due to the poor performance of any single investment. The built-in diversification of mutual funds lowers the investment risk involved. Therefore, mutual funds can be quite a smart investment tool for newbie investors who do not have the resources or knowledge to build a diverse portfolio independently.
- Professional Management: All mutual funds are managed by financial experts or fund managers. These experts make investment decisions on behalf of the investors. Therefore, you do not have to do any mutual fund calculation yourself or even monitor each investment. The fund manager will do this on your behalf.
- Liquidity: Mutual funds are a relatively liquid investment. This means that you can buy or sell off your units with ease. Additionally, open-end mutual funds enable investors to redeem their units at the current net asset value (NAV) of the fund on any business day.
- Tax Benefits: There are specific mutual funds like Equity Linked Savings Schemes (ELSS) investing in which you can enjoy tax benefits under Section 80C of the Indian Income Tax Act. ELSS does have a lock-in period of three years but can be a great tool for enjoying tax savings.
- Flexibility and Accessibility: Due to the flexibility of having a variety of funds to choose from, mutual funds can accommodate varying risk appetites and investment goals. They also have low entry requirements, which makes mutual funds accessible to a wider range of investors. They have investments starting at a fairly nominal sum, along with the option to contribute periodically through systematic investment plans (SIPs). Therefore, investing in mutual funds shall be a prudent choice for investors with strict budget limitations and modest starting capital.
Types Of Mutual Funds
Knowledge of diverse types of mutual funds would help you select the appropriate one based on your specific investment goals and risk appetite.
- Equity Funds: These funds majorly invest in stocks and are considered to be a good choice for investors aiming for growth and willingness to accept higher risk. Equity funds can be of multiple types. Small-cap funds, for instance, invest in small, high-growth companies, and large-cap funds focus on large, established companies. Multi and flexi cap, on the other hand, invests across market capitalizations.
- Debt Funds: Such a form of mutual fund invests in debt instruments like bonds. Debt funds can provide a steady income to investors and typically have lower risk involved in comparison to equity funds. Debt funds are ideal for investors requiring investments with modest growth potential, along with relative stability.
- Hybrid Funds: Seeking to balance relative stability with growth potential, hybrid funds invest in a mix of equity and debt securities. Hybrid funds can be conservative, balanced or aggressive.
Selecting a mutual fund that aligns with your financial requirements relies on multiple factors. These factors include the tenure of your investment, your financial goal to be fulfilled, as well as your risk appetite. Before investing in mutual funds, you need to determine how much risk you are comfortable taking. For risk-averse, debt or balanced funds would be better than equity funds. You also need to think about your financial goals, whether you are saving for short-term needs or long-term goals. Ultimately, you have to assess and select the investment tenure.
Disclaimer: This information is for general knowledge and educational purposes only and does not constitute financial advice.
