Mutual Fund Sahi hai….

The mutual fund industry has been growing rapidly in the last few years. People have now started looking at options other than PPF, FD, etc. to save and grow their wealth and a mutual fund is the most flexible and hassle-free mode of investment. But choosing the right fund fitting for your needs is not as easy as it sounds since it comes with its own set of risks. If you are not careful while selecting these funds, it can adversely impact your savings and hence your overall well being.

A mutual fund can seem complicated at first but I’m going to simplify it for you so that anybody can feel confident to choose and invest after reading this article. 🤞

Technically a mutual fund is a collection of money that is received from a pool of investors who share a common investment objective and then invested in different sectors like equity, bonds, securities and/or other risk-free instruments. The fund is collected by AMC or Asset Management Company and managed by fund managers of that company who charges a nominal fee from the investors for handling their funds. Each investor owns some units which represents a portion of the holding of the funds. The profit generated from these collective investments is distributed proportionally amongst its investors. There are two ways to invest in a mutual fund, lump sum and SIP or Systematic Investment Plan. In the Lumpsum method, you can put all your money in a single instant in any fund while in SIP you pay a certain amount of fixed money every month, week or any fixed time which you decide for yourself.

But before reading further let’s ask the first question, why?

Why mutual fund?

1. The most obvious answer would be the rate of return. It can give a much better interest rate with some risk than the other popular money-saving instruments like FD, PPF, government bonds, etc.
2. It’s also a good place for people who’s interested in the stock market but don’t hold sufficient knowledge to invest directly. Such people can transmit the burden of selection and analysis of stocks to the expert fund managers and reduce the risk of making bad decisions and hence losing money.
3. A section of a mutual fund, also known as ELSS funds can help in saving taxes under Section 80C of the Income Tax Act, 1961. If you are interested in knowing more about this then you can visit https://rr-rashmi.medium.com/introducing-tax-saving-elss-funds-8d9402e6e909.

Now if you’re a little convinced about the advantages of mutual funds, let’s dive into knowing its different types so that everyone can have some option to choose from depending on their own needs, goals, investment term, risk profile, budget and interest.

Types of mutual fund

Based on the maturity period, mutual funds can be categorised into 3 different segments.

1. Open-Ended Funds
   These are the most widely used funds since they don't have any maturity period. People can buy or sell the fund on any working day at the NAV of the scheme. The NAV or Net Asset Value is the price that determines the performance of the underlying securities of the fund. These funds are not traded on the stock market and could be bought from the fund house directly or through any broker. There is no limit on the number of units that can be issued. Though it enjoys maximum liquidity, it’s highly volatile too as they are prone to market risks.
2. Close Ended Funds
   These kinds of funds have a fixed maturity period. A fixed number of units are issued during its launch via NFO (New Fund Offer). Investors can’t purchase any more funds after this period ends or redeem their units before the maturity period ends. They are then traded on the stock market where their traded price can be more or less than its NAV, depending upon the demand & supply of the units. Only a Lump sum investment option is available here unlike Open-Ended Schemes where both Lump sum & SIP options are possible.
3. Interval Funds
   You guessed it right, it’s a combination of both open and close-ended funds. Investors can purchase and/or sell their fund during specific time intervals only which is declared by the fund houses. Very few schemes are launched as interval funds and the selling or buying of these kinds of funds happens at their NAV. Both debt and equity instruments can be included in these funds portfolio and they can also face liquidity issues.

Based on different investment strategy and asset allocation, mutual funds can also be categorised into the following schemes

1. Equity Funds

As the name suggests, these kinds of funds invest in stocks of different companies. They have high return potential with more risks than the debt funds since they depend upon the market volatility. Equity funds can be further classified into 3 subcategories depending upon their investment strategy. A theme-based or sector-based funds invest most of its assets in a specific sector. A focussed fund invest in a maximum of 30 stocks and a contra fund finds under-performing stocks and invests in them with an expectation of higher return in a longer period. Apart from these, equity funds are majorly classified on the basis of market capitalization.

a. Large-cap funds (min 80% of assets in large-cap companies i.e. top 100. companies)
b. Mid-cap funds (65% of assets in mid-cap companies i.e 101–250th rank companies)
c. Small-cap funds (65% of assets in small-cap companies whose rank is from 251–500)
d. Multi-cap funds (65% of assets in shares of large-cap, mid-cap and small-cap companies of varying proportions)

2. Debt funds

Debt funds invest in securities that give fixed income like corporate bonds, treasury bills, government securities etc. These are low-risk schemes since they give a fixed interest rate after the maturity period is over. They are not dependent on market fluctuations. Debt funds can be classified into liquid funds, corporate bond funds, gilt funds, short-duration funds, long-duration funds, overnight funds, banking and PSU funds, etc. based on the maturity period. Though this is comparatively a safer alternative to equity schemes, it can carry a certain amount of credit risk, interest rate risk and liquidity risk sometimes. If you want to know more about the details of all these debt funds then I can write another article about all this.

3. Hybrid schemes

Hybrid funds are a combination of both equity and debt funds. The fund manager creates a portfolio where he keeps both equity and debt in varying proportions depending upon the investment objective. Since it’s a combination of both hence it’s riskier than debt funds but safer than equity schemes. A debt-oriented hybrid fund invests 60% of its assets in fixed-income securities like bonds, treasury bills, etc. and rests of them in equities while an equity-oriented hybrid fund invests 60–65% of its assets in equities and rest in debt related instruments.

Now I believe you have understood some basic concepts of mutual funds and how there are plenty of options available in the market for every kind of investor. This will not only help you as an investor but it will also help in improving our country’s economy since you will be indirectly investing in someone’s business, providing them with the much-needed capital for their growth and expansions and hence also generating more employment.

Keep learning, keep investing!✌️

All about IPO 💰