A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other assets. The combined holdings of stocks, bonds, or other assets the fund owns are known as its portfolio. A Mutual Fund can be understood as a financial vehicle. This financial vehicle is made by collecting pooled funds from various individuals or investors. And this collected or pooled money would then be invested in securities, bonds, shares, and different money market instruments, as well as other assets.
Mutual funds will be managed by experts who have experience and expertise in handling investment amounts. They will plan the investment and invest the available money by building a viable portfolio. The funds will be allocated among various investment assets and will earn capital gains for the investors.
This is seen as a most viable investment option which would give a normal investor an opportunity to invest in professionally managed funds or portfolios which would include equities, stocks, bonds, and various other types of securities or money market instruments. The performance of the securities in which the mutual fund has been invested is analyzed with the analysis of the change in the market cap, which is derived by aggregating the performance of the investments that are underlying the same.
In simple words, a mutual fund is a way of combining people’s money and investing it in stocks, shares, bonds, and other securities. Each mutual fund will have various investors who hold their own share of investment as part of the portfolio built by the experts who handle or manage the mutual fund.
The income or gain earned by the mutual fund would be divided among the holders or investors after certain expenses are deducted by computing the scheme’s Net Asset Value (NAV).
What is NAV in a Mutual Fund?
NAV or Net Asset Value is computed as follows
The current value of the total fund assets minus the total fund liabilities, which would then be divided by the total number of outstanding units of the mutual fund, or we can put it out the same as [(total value of assets-total value of liabilities)/total number of outstanding MF units]. With NAV, investors can analyze and track the performance of their mutual fund.
The AMC or Asset Management Company registration that manages the mutual fund is liable to declare the NAV of its various schemes on most business days.
For example, if the market value of a mutual fund’s securities is INR 1000 Lakhs. And the fund has issued 15 Lakh units. The NAV per unit should be INR 66.67,i.e., INR 600 Lakhs/10 Lakh units.
Types of Mutual Funds
Open-Ended Funds
Under this fund, an investor can invest in or enter the mutual fund and redeem or exit at any time. This is because it does not have a fixed maturity period.
Close-Ended Funds
This scheme, unlike open-ended mutual funds, has a definite maturity period. An investor can enter into such a mutual fund only during the New Offer Period, which is the initial period. It will be automatically redeemed on reaching the maturity date and will be listed on the stock exchanges.
Money market or Liquid Funds
They invest in short-term debt instruments that provide employees with a reasonable return over a short period of time. Investors with a low-risk appetite opt for this type of mutual fund. They tend to park their surplus funds in this for the short term to earn more.
Fixed Income Mutual Funds
They are also known as debt mutual funds. Fixed coupon-bearing instruments like bonds, government securities, debentures, etc., are below this. The risk is low here, and the return is also low. However, they offer the investor a fixed and steady income.
Balanced funds
As the name suggests, this would divide investors’ investments into debt and equity investments. The allocation here would keep changing based on changes or shifts in market risks. It is suitable for investors who are looking for a moderate return with a lower risk compared with other investment options.
Gilt Funds
These are the ones investing only in Government securities. Risk-averse investors choose this option because they do not have an appetite for the credit risk associated with the investment.
Monthly Income Plans
The hybrid income plans, or the monthly income plans, are almost similar to balanced funds and are also called marginal equity funds. The retired folks who are looking for a regular income source with comparatively low risk can be termed as the monthly income plan.
Advantages or Benefits of Mutual Fund Investments
High Liquidity
One of the major benefits held by a mutual fund is the high liquid option of the mutual fund. This is because the mutual fund’s units can be redeemed at any time. This provides you with a choice for flexible withdrawal, but it is recommended that the exit load and pre-exit penalty charges be taken care of.
Diversification
The AMC managing the Mutual Fund would build a portfolio of investments wherein diversity would be maintained. When the value of one investment goes down or is likely to go down, another investment that is performing well will be present, and thereby, the value will be high. This will ensure that the overall performance of the portfolio or mutual fund does not decline. This would, therefore, reduce the risk involved for an investor while investing.
Managed by Experts
Mutual funds provide individual investors or small-scale investors with easy access to funds managed by experts. These experts know how much to invest, when to invest, and where to invest. The experts pool money from different investors and then allocate this money to various securities available in the market, thereby helping investors earn a profit from investments.
The expert is watching the market closely for the investor and would make decisions concerning the timely entry and exit.
High flexibility offered
Mutual funds provide high flexibility to investors. They do not need to put a large amount of money into the mutual fund, and they can start with a small amount of investment. There is a Systematic Investment Plan, or SIP, which allows salaried individuals to invest small amounts on a monthly basis.
Easy and faster accessibility
Mutual funds can be easily accessed, and you can start investing in them easily, anywhere in the world. AMCs offer the funds through brokerage firms, AMCs, agents, banks, or even online mutual fund platforms.
Safe and transparent
This is a safe and transparent investment option as they are made as per the SEBI Guidelines. The mutual fund’s products will be labeled or fund-coded and will help the investor to analyze the level of risk involved in their investment. The color coding includes mainly three colors as provided below:
– Blue, which indicates a lower risk,
– Yellow, which indicates a medium risk, and
– Brown, which indicates a higher risk.
Tax-saving option
It provides a tax-saving option, as the ELSS mutual funds are exempt from tax under section 80C of the Income Tax Act up to INR 1.5 Lakhs.
Lowest lock-in period
It provides the lowest lock-in period of 3 years, which is lower than that of other tax-saving options like PPF (Provident Fund), Fixed Deposit, etc., as their lock-in period is either 5 years or more and not lower than the same.
