Mutual Funds An Introduction
I have discussed mutual funds in the post overview of All the Instrument Present in the Indian Economy , 80C Instrument and A financial guide for The Beginner. Let’s try to understand mutual funds more deeply. This article for the creation of awareness about the Mutual funds. So do read and consider Mutual Funds as well in your investment decisions. In upcoming articles on this topic, you can follow the detail discussion and intricacies of mutual funds.
What is mutual Fund
In simple words, mutual funds are the pool of funds which is collected from investor like us.The objective of this funds is to generate the return by investing the collected money in the different underlying instrument. A Mutual fund is managed by an expert or team of experts and they have experience and expertise in managing big funds. Whatever return has been generated after deducting the cost of fund management will be distributed among the investor as per their contribution .
Benefits of Investing through Mutual Funds
Mutual Fund is managed by Fund managers which are a team of market experts. Our hard-earned money is invested through the experts who have the in-depth knowledge and research about the market. Which reduce the risk associated with the investment. You can stay in peace since you chose a well-informed way for Investment.
Type of Mutual Funds
There are different categories of mutual funds you can choose your funds as per your risk appetite.
Equity Mutual Funds
Funds whose underlying instruments of investment is Equity are Equity Mutual Funds. These are the funds which have the highest risk associated with these funds directly deal with equity. Equity funds can further be subdivided into following subclasses Large Mid and Small Cap Funds,Sectoral Funds,Index Funds and ELSS Funds.
Large Mid and Small Cap Funds: Funds which invest their amount in respectively large,mid and small-cap company. Their risk reward ratio also decreased as per the market capitalisation of companies. Large cap funds are less risky and least rewarding, on the other hand, small-cap funds are most risky but you may get the higher returns.
Sectoral Funds: Funds which are sector specific such as the pharmaceutical fund or IT funds are Sectoral fund. This kind of funds only invests in underlying equities of the corresponding sector.
Index Funds: Fund which only invest in the equity of Index company such as NIFTY 50 or SENSEX are Index Funds. There return directly replicate the gain or loss of the corresponding Index.
ELSS Funds: This is a special class of Equity fund designed for 80C investment. Equity linked saving scheme funds have the locking period of three years. This investment we can claim for exemption in 1.5 lakh of 80C.
Debt Mutual Funds
Funds whose underlying instruments of investments are debt-oriented instruments like corporate and government bonds, FDs are debt Mutual funds. Return on investment of such funds is less compared to Equity-oriented funds but the risk is also less. This type of funds is more suitable for less risk taking people such as Senior citizens.
Money Market and Liquid Funds
Such funds are available for short and ultra short-term. So they are liquid by nature. These funds mostly invest their money in corporate and banks FDs. So this kind of funds is most suitable for parking your saving bank amount. Since it maintains liquidity as well as give more return than saving bank account. Even the risk factor is negligible here.
Since it’s clear from the name itself these funds are hybrid in nature. They don’t park their money in just one class of instrument but they choose the various class like debt, bonds, FDs, equity. Portfolio of such funds is mixed with the different class of instrument. In this way, they can keep the well-diversified portfolio. Which helps them to manage moderate return with moderate risk.
Indeed mutual funds are a better way to generate wealth in a long-term. There are the lump sum and SIP way of contribution to the mutual fund. Even a novice person can consider mutual funds for the better returns. Remember even mutual funds are a market linked instrument so they inherit the risk of the market but the risk associated with mutual funds is less compare to the direct investment in the market. And from a variety of the funds, you can always choose a fund as per your risk appetite.
Disclaimer: I am not a certified financial adviser but I am a keen financial observer. Take the advice of your financial expert before investing.