Mutual Funds

A mutual fund is a common pool of money in which investors put in their contribution to obtain units. This collective amount is then invested by professional fund managers according to the investment objective of the fund. Each fund based on the asset category could invest in stocks, bonds, money market instruments, gold and other similar assets. The income earned through these investments and capital appreciation realized by the scheme are shared by the investor in proportion to the number of units owned by them.

Types of Mutual fund

  • Open End funds – An open-end fund is a mutual fund scheme that is available for subscription and redemption on every business day throughout the year.
  • Closed End funds – A Closed-end fund is a mutual fund scheme that is available for subscription only during the initial offer period and can be redeemed only on maturity. However, the Units of these fund would be listed on a stock exchange after the new fund offer, and investors can buy/sell these units in the stock exchange.

Based on the Management Style

  • Actively Managed funds – Fund managers buy and sell investments, attempting to generate higher returns than the benchmark.
  • Passively Managed funds – Funds managers buy a portfolio that tracks benchmark performance.

Based on the Asset Class

  • Equity funds – Funds that invest in Equity shares are called Equity funds. They carry the principal objective of capital appreciation of the investment over medium to long term investment horizon.
  • Balanced Funds – Funds that invest in a mix of Equity shares and debt (fixed income) instruments. They strive to provide both growth and regular income. They are ideal for medium to long term investors willing to take moderate risk.
  • Debt Funds – Funds that invest predominantly in rated debt / fixed income securities like corporate bonds, debentures, government securities, commercial papers and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seeking regular and steady income.
  • Other funds – All investments other than traditional asset class (Equity & Bond) are categorized as alternative investments. Mutual funds offer funds in which investor can invest in the alternative assets like gold, real estate etc. We categorize these funds into basket of other funds. These funds have different risk/return profile compared to Equity & Debt funds, thus could fit well in a portfolio context.

Advantages of Mutual Fund

  •  Professional Management
  • Diversification benefits
  • Flexibility in investment
  • Liquidity
  • Transparency
  • Low cost

Mode of investment

  • Lump sum (bulk or one time investment)
  •  Systematic Investment Plan (SIP)
  • Systematic Transfer Plan (STP)