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Everything You Need To Know About Mutual Funds

Published On Aug 06, 2021 1:00 PM By InsuranceDekho

Individual individuals can invest in mutual funds to have access to a professionally managed portfolio. You can also diversify your portfolio by investing in mutual funds, which have a diverse asset allocation. Investors are assigned fund units based on their investment amount. As a result, each investor will make or lose money in direct proportion to the amount they invested. The fund manager's primary goal is to maximise returns for investors by investing in assets that are aligned with the fund's goals. The change in the fund's total market capitalization is frequently used to measure performance. One of the best things about Mutual Funds is that you can invest in them easily, anywhere and anytime. Let's dive further into the world of mutual funds.

What are Mutual Funds?

A mutual fund is a type of investment vehicle that is created when an asset management company (AMC) or fund house gathers contributions from many individuals and institutional investors that have similar financial goals. A fund manager, who is a finance specialist, oversees the pooled investment. The fund manager makes stock and bond transactions that comply with the investment objectives. Moreover, mutual fund performance is determined by the underlying assets. In conclusion, it can be said that mutual Funds are similar to virtual corporations that deal with the purchase of a company's stocks/units after a thorough assessment by an investment advisor.

What are the Types of Mutual Funds?

According to their asset allocation and equity exposure, mutual funds in India are divided into three categories: equity funds, debt funds, and balanced mutual funds. Hence, the risk taken and the returns delivered by a mutual fund plan are determined by its type.

  • Equity Mutual Funds

Equity funds invest primarily in equity shares of companies with a range of market capitalizations. If a mutual fund invests at least 65 per cent of its portfolio in equity instruments, it is classified as an equity fund. Among all mutual fund classes, equity funds have the potential to provide maximum returns. Equity fund returns are determined by market movements, which are influenced by various geopolitical and economic events. The different types of equity funds include small-cap funds, mid-cap funds, large-cap funds, multi-cap funds and index funds.

  • Debt Mutual Funds

Debt mutual funds primarily invest in money-market, debt and other fixed-income instruments like government bonds, Treasury bills, certificates of deposit and other highly rated assets. If a mutual fund invests at least 65 per cent of its portfolio in debt securities, it is classified as a debt fund. Since market conditions do not strongly influence their performance, debt funds are suitable for risk-averse investors as the returns are relatively predictable. The different types of debt mutual funds include income funds, dynamic bond funds, liquid funds, fixed maturity funds, short term and ultra short term debt funds and credit opportunities funds.

  • Balanced/Hybrid Mutual Funds

Mutual funds that are balanced or hybrid invest in both equities and debt products. The main goal of hybrid funds is to diversify the portfolio and balance the risk-reward ratio. Depending on market conditions, the fund manager would adjust the fund's asset allocation to benefit investors and lower risk levels. Hybrid funds are an excellent method to diversify your portfolio since they expose you to equities and debt securities. The different types of balanced mutual funds include equity-oriented hybrid funds, debt-oriented hybrid funds, arbitrage funds and monthly income plans. 

What are the Benefits of Mutual Funds?

Mutual funds are an excellent investment option for a variety of reasons, including flexibility, diversification, and experienced money management. Here is the list which explains about such benefits in detail. 

  • Affordability

Mutual funds are seen as the best investment opportunity for small investors due to their affordability. Investing in mutual funds is inexpensive, making it appropriate for small investors. Moreover, to handle investors' investments, mutual fund houses or asset management firms (AMCs) charge a modest fee known as the expense ratio. Since the Securities and Exchange Board of India (SEB) has fixed the expense ratio to be under 2.5 per cent, it typically varies from 0.5 per cent to 1.5 per cent of the entire invested amount.

  • Professional Money Management

Asset management firms (AMCs) or fund houses consolidate their investments, which fund managers manage. These are financial gurus who have a track record of managing investment portfolios successfully. A team of analysts and specialists also assists fund managers in selecting the best-performing firms and assets with the potential to deliver excellent long-term returns for investors.

  • No Lock-In Period

The majority of mutual funds have no lock-in period. The lock-in period is a period during which investments cannot be withdrawn once they have been made. In exchange for a penalty, some investments allow for early withdrawals during the lock-in period. The majority of mutual funds are open-ended, with different redemption exit loads. However, it must be noted that only the investments made in ELSS mutual funds have a lock-in period.

  • Systematic Investment Plan (SIP)

The key benefit of investing in mutual funds is that you can invest a small amount regularly through a systematic investment plan (SIP). Your SIP can be set to run monthly, quarterly, or half-yearly, according to your preferences. You can also choose the ticket size for your SIP. It must, however, be less than the minimum investable amount. You can start or stop a SIP whenever you want. Investing using SIPs eliminates the need to set aside a significant payment to begin your mutual fund investment. With a SIP, you can schedule your investments over time and profit from rupee cost averaging in the long run.

Take Away

When it comes to investing your hard-earned money, there are several factors to consider. It doesn't matter if you're investing in stocks, mutual funds, or something else. Hence, always consider all of the advantages and disadvantages and even hire a financial counsellor to help you through the process.

Also read 

Should You Buy Term Insurance With Mutual Fund Or ULIP?

Should I Purchase Term Insurance Even If I Don't Have Any Dependents?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.        

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