What is Mutual Fund

Mutual Fund is a vehicle to pool money from investors for the purpose of investing in securities such as stocks, bonds, money market instruments, commodities and other assets in an attempt to produce capital gains and income for the fund's investors. Mutual Funds are operated by Professional fund managers, who manage the money for the benefit of their investors in return of a management fee. A Mutual Fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. Mutual Fund is a suitable investment option for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Types of mutual funds in India

There are many different types of mutual funds categorised based on structure, asset class and

Based on asset class

  • Equity Funds: These are funds that invest in equity stocks/shares of companies. These are considered high-risk funds but also tend to provide high returns.
  • Debt Funds: These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns.
  • Money Market Funds: These are funds that invest in liquid instruments e.g. T-Bills, CPs etc. They are considered safe investments for those looking to park surplus funds for immediate but moderate returns.
  • Balanced or Hybrid Funds: These are funds that invest in a mix of asset classes. In some cases, the proportion of equity is higher than debt while in others it is the other way round. Risk and returns are balanced out this way.
  • Sector Funds: These are funds that invest in a particular sector of the market e.g. Infrastructure funds invest only in those instruments or companies that relate to the infrastructure sector. Returns are tied to the performance of the chosen sector. The risk involved in these schemes dependS on the nature of the sector.
  • Index Funds: These are funds that invest in instruments that represent a particular index on an exchange so as to mirror the movement and returns of the index e.g. buying shares representative of the BSE Sensex.
  • Tax-Saving Funds: These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.
  • Fund of funds: These are funds that invest in other mutual funds and returns depend on the performance of the target fund.

Benefits of investing in Mutual Funds

  • Professional management : Qualified professionals with the support of a research team that continuously analyses the performance and prospects of companies manage the money.
  • Diversification : Diversification lowers the risk of loss by spreading the money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion.
  • More choice : Mutual Funds offer a variety of schemes that will suit the needs of an investor over a lifetime.
  • Affordability : Mutual Funds offer investors an affordable way to diversify their investment portfolios.
  • Tax benefits : Investments held by investors for a period of 12 months or more qualify for capital gains and will be taxed accordingly. These investments also get the benefit of indexation.
  • Liquidity : In open-end funds, one can redeem all or part of his investment any time he wishes and receives the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardised, making it quick and efficient so that one can get his cash in hand as soon as possible.
  • Transparency : The performance of a Mutual Fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. A unit holder is provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy.
  • Regulations : All Mutual Funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI.