Mutual Funds is a company or organization that brings together a large group of people and invests their money in securities such as stocks, bonds, commodities like gold, and short-term debts. The combined holdings of the mutual fund are known as its portfolio. And then the holdings are divided into units or shares that represent a holding in the Mutual fund.
The market value at which these shares can be bought or sold is called the Net Asset Value (NAV). These NAVs keeps on increasing or decreasing according to the fund holdings in the market. It is a great option if you want to diversify your investments easily.
Benefits 0f investing in mutual funds:-
Mutual funds are actively managed by a professional money manager who constantly monitors the stocks and bonds in the fund's portfolio. Hence, investors who do not have much knowledge about the market or do not have time to analyze the market can invest through mutual funds. An investor can start investing in mutual funds with a small amount like 200 or 500 rupees. Or the Systematic Investment Plans (SIPs) has become popular in the recent few years.
when you own a mutual fund, compounding allows you to earn interest on your principal. The best way to take advantage of compounding is to start saving and investing wisely as early as possible. The earlier you start investing, the greater will be the power of compounding.
Types of Mutual Funds:-
1. Equity Mutual Funds- invest mostly in shares of companies across all market capitalization. Equity funds have the potential to offer the highest returns among all classes of mutual funds. These are also further classified into:-
- Small-cap funds (companies with small market capitalization).
- Mid-cap funds (companies with medium market capitalization).
- Large-cap funds (companies with large market capitalization).
- Multi-Cap Funds (companies of all market capitalization).
- Sectoral funds invest in stocks of a particular sector like FMCG and IT.
- Equity-linked savings scheme (ELSS) is the only kind of mutual funds covered under Section 80C of the Income Tax Act, 1961. Investors can claim tax deductions of up to Rs 1,50,000 a year by investing in ELSS ( Tax saving mutual funds).
2. Debt Mutual Funds - Invest mostly in debt and fixed income instruments such as treasury bills, government bonds, certificates of deposit, and other high-rated securities. These are also further classified into:-
- Dynamic Bond Funds are those debt funds in which the fund manager modifies the portfolio depending on the fluctuations in the interest rates.
- Income Funds invest in securities that come with a long maturity period and therefore, provide stable returns. The average maturity period of these funds is five years.
- Short-term and ultra short-term debt funds are those debt funds that invest in securities that mature in one to three years. These funds are ideal for risk-averse investors.
- Liquid funds are debt funds that invest in assets and securities that mature within ninety-one days. Liquid funds are a great option to park surplus funds, and they offer higher returns than a regular savings account.
- Gilt Funds are debt funds that invest in high-rated government securities. It is for this reason that these funds carry extremely low risk and are apt for risk-averse investors.
- Credit Opportunities Funds mostly invest in low rated securities that have the potential to provide higher returns. It is for this reason that these funds are the riskiest class of debt funds.
- Fixed maturity plans (FMPs) are close-ended debt funds that invest in fixed income securities such as government bonds. One can invest in FMPs only during the fund offer period, and the investment will be locked-in for a specified period.
3. Balanced or Hybrid Mutual Funds - Invest across both equity and debt instruments. These are also further classified into:-
- Equity-Oriented Hybrid Funds - its portfolio in equities while the rest is spent on money market or debt instruments.
- Debt-Oriented Hybrid Funds - its portfolio in purchasing debt instruments such as treasury bills and government securities and the rest are invested in equity.
- Monthly Income Plans - Investors can decide if they like to receive dividends on a monthly, quarterly, or annual basis.
- Arbitrage Funds.
What is a Systematic Investment Plan (SIP)?
SIP is a scheme offered by the mutual funds where one can invest a sum of money at periodic intervals. In the case of SIP, one can invest on a weekly, monthly, or quarterly basis as per his or her convenience. And that's where the power of compounding takes place by growing your money exponentially. You can reap the benefit of your investment at a later age.
As we say,
- Set your financial goals
- Decide when you will need the money
- Decide how much you need to invest
- Make a choice of a good mutual fund plan.
Risks of Mutual Fund:-
The offered document is an outline that contains helpful data about the planned shared store.
- Interest rate risk - the wrong prediction in the interest rate may lead to a loss.
- Risk due to inflation - Money market returns should be more than the inflation rate otherwise an investor will lose its purchasing power.
- Risk because of the fund manager - The performance of the mutual fund is highly dependent on the ability of the fund investor.
Why mutual funds are good for you?
- Risk diversification - because your investments are diversified into multiple options.
- Low maintenance cost - You don't have to maintain your mutual fund by providing any premium.
- Prompt decision making - You have the funds manager to make major decisions from time to time.
- Easing your burden - You just need to have patience and money while investing in them.
Tips for investing in mutual funds?
- Know your risk appetite first.
- A long time horizon yields higher returns providing that the stocks invested are of good company.
- Investing in sip can be a good idea for long-term investments.
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