Mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.
Mutual Funds Offer
Professional Management
The fund managers do the research for you. They select the securities and monitor the performance.
Diversification
Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails, “Don’t put all your eggs in one basket”.
Affordability
Most mutual funds set a relatively low cost for initial investment and subsequent purchases.
Liquidity
Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV).
Mutual funds focus on investing in portfolios that contain assets that revolve around a specific theme. For instance, one mutual fund may focus on investing in the best value stocks on the market. Another may focus on building a portfolio of international stocks. Others still revolve exclusively around blue-chip stocks or those that tend to offer high dividends.
No matter what type of assets you are interested in investing in, there is more than likely a mutual fund out there that focuses on it.
A mutual fund keeps track of how much each investor puts into the fund by dividing the total amount into shares, like stocks. The price of a share reflects what is often referred to as net asset value (NAV) per share, or sometimes NAVPS. Unlike stocks, which constantly change in price throughout the day, NAVs are only updated once at the end of each trading day.
If you want to cash out your shares, you can do so at the current per-share price they reflect.
Types of Mutual Funds
1. Equity Mutual Funds
Invest predominantly in equities that is, shares of companies. The primary objective is wealth creation or capital appreciation. They have the potential to generate higher return and are best for long term investments.
Large Cap Funds: Invest predominantly in companies that run large established business.
Mid Cap Funds: Invest in mid-sized companies.
Small Cap Funds: Invest in small sized companies.
Flexi Cap Funds: Invest in a mix of large, mid, and small sized companies.
Multi Cap Funds: Invest in a mix of large (25%), mid (25%), and small (25%) sized companies.
Sector Funds: Invest in companies that are related to one type of business. For example, Technology funds that invest only in technology companies
Thematic Funds: Invest in a common theme. For example, Infrastructure Funds that invest in companies that will benefit from the growth in the infrastructure segment.
ELSS Funds: Tax-Saving Funds invested for lock-in period of three years.
2. Income / Bond / Fixed Income Funds
Invest in fixed income securities, like: Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, and so on.
These are relatively safer investments and are suitable for Income Generation.
Liquid Funds
Short Term
Long Term
Floating Rate
Corporate Debt
Dynamic Bond
Gilt Funds
3. Hybrid Funds
Invest in both equities and fixed income, thus offering the best of both, Growth Potential as well as income generation.
Aggressive Balanced Funds
Conservative Balanced Funds
Pension Plans
Child Plans
Monthly Income Plans
Mutual Funds Offer Three Ways to Earn Money
Dividends
A fund may earn income from dividends on stock or interest on bonds. The fund then pays the shareholders nearly all the income, less expenses.
Capital Gains Distributions
The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, the fund distributes these capital gains, minus any capital losses, to investors.
Increased NAV
If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV reflects the higher value of your investment.
All funds carry some level of risk. With mutual funds, you may lose some or all the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.
A fund’s past performance is not as important as you might think because past performance does not predict future returns. But past performance can tell you how volatile or stable a fund has been over a period. The more volatile the fund, the higher the investment risk.