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Posted on March 9, 2022
Mutual Funds – What is Mutual Fund, Types and Benefits
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 pooling funds from various individuals or investors. And this collected or pooled money would then be invested in securities, bonds, shares, and various money market instruments as well as other assets.
Mutual funds will be managed by experts who have experience and expertise in the handling of the investment amount. They would plan the investment and invest the available money by building a viable portfolio. The funds would be allocated among various investment assets and would earn capital gains to 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 done with the analysis of the change in the market cap, which is derived again by aggregating the performance of the investments that are underlying the same.
So, in simple words, we can say that mutual fund is bringing together people’s money and investing the same in stocks, shares, bonds, and other securities. Each mutual fund will have various investors and would be holding their own share of investment as a part of the portfolio built by the experts who are handling or managing the mutual fund.
And the income or gain which has been earned by the mutual fund would be divided among the holders or investors after the deduction of certain expenses by computing the Net Asset Value (NAV) of the scheme.
What is NAV in Mutual Fund?
NAV or Net Asset value is computed as following
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 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.
For example, the market value of securities of a mutual fund is INR 1000 Lakhs. And the mutual fund has issued 15 Lakh units. Then the NAV per unit here would be INR 66.67 per unit i.e., INR 600 Lakhs/10 Lakh units.
Types of Mutual Funds
Under this fund, an investor can invest or enter and also redeem or exit from the mutual fund at any time. This is because it does not have any fixed maturity period.
This unlike open-ended mutual funds scheme 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. And it will get 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 which would provide the employees with a reasonable return over a short period of time. The investors with a low-risk appetite are the ones who opt for this type of mutual fund. And 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 the ones coming below this. The risk is low here while the return is also low. But they would offer the investor a fixed and steady income.
This as the name suggests would divide the investment of investors into debt and equity investments. The allocation here would keep changing on the basis of the change or shift in market risks. It is suitable for investors who are looking for a moderate return with a lower risk when compared with other investment options.
These are the ones investing only in Government securities. The risk-averse investors go for this and do not have an appetite for 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
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 point in time. This provides you option with flexible withdrawal but it is recommended that the exit load and pre-exit penalty charges are taken care of.
The AMC managing the Mutual Fund would build a portfolio of investments wherein there will be diversity maintained. With this when the value of one investment goes down or is likely to g down, there will be another investment that is performing well, and thereby the value is high. So, this will ensure that the overall performance of the portfolio or mutual fund is not declining. This would therefore reduce the risk involved for an investor while making the investment.
Managed by Experts
Mutual funds provide individual investors or small-scale investors an opportunity to get easy access to funds that are managed by experts. They hold good knowledge regarding how much to invest, when and where to invest. The experts would pool money from different investors and then allocate this money to various securities which are available in the market, and thereby helping investors earn a profit from investment.
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 the investors as they need not put in a high amount of money in the mutual fund and can start the same with a small amount of investment. There are 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 mutual funds easily, staying anywhere in the world. AMC offers the funds and offers the same 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 color-coded and would be helping the investor to analyze the level of risk involved in his investment. The color coding includes majorly 3 colors as provided below:
– Blue which is indicating a lower risk,
– Yellow which is indicating a medium risk, and
– Brown which is indicating higher risk.
Tax saving option
It provides tax saving option as the ELSS mutual funds have tax exemption 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 when compared to the other tax saving options like PPF (Provident Fund), Fixed Deposit, etc. as they lock-in period is either 5 years or more and not lower than the same.