What is a Mutual Fund?
A mutual fund is made up by collecting a pool of money from many investors to invest in securities money markets and other assets etc.
Let’s say there are 4 people. Ramesh, Suresh, Himesh, and Nilesh.
These three people want to invest in stocks or commercial papers or any other investment instrument. Individually they do not have enough money to invest in these things.
Now a mutual fund company approaches them and collectively collects the money and then invests them in accordance with their mutual fund investment schemes. This company is known as an Asset Management Company (AMC).
At the time of returns, the gains are distributed among the investors. In this gain, a small amount is kept for the mutual fund company which is usually 1-3% commonly known as Expense Ratio or Management Expense.The lower the expense ratio better is the mutual fund scheme.
There is a mutual fund manager appointed in every mutual fund scheme.
Why you should invest in a mutual fund?
– Professional management of investment: The fund managers of the mutual fund scheme do the research work for you. According to their analysis, they select the right securities you should invest in.
– Diversification: Mutual funds invest in various companies so if one company’s share fails then you have other companies too. This helps to lower the risk.
– Affordable: Most mutual funds have low rates for initial investments and also for further purchases.
– Liquid: Mutual fund investors can easily redeem their shares at any time though there are some exit charges for early exits.
What are the types of Mutual Funds?
According to the Securities and Exchange Board of India (SEBI), these are the following types of mutual funds:
Collected money would be invested in equities . These mutual funds are also known as stock funds.
Debt Mutual funds:
Invests in fixed income instruments such as corporate and government bonds, corporate debt securities, etc.
Hybrid Mutual funds
A little bit of equity + a Little bit of debt. Sometimes these mutual funds also include gold and real estate.
Solution-Oriented/Goal-oriented Mutual funds
Suitable for those investors who are investing with an objective such as foreign trips, buying a house/ car, marriage, etc. Lock-in period is five years.
Liquid mutual funds
Mutual funds that invest in securities with residual maturity up to 91 days. Assets are not tied up for a long time as liquid funds do not have a lock-in period. These are the lowest risk mutual funds.
Things to consider when buying Mutual funds.
Charges: Some mutual funds charge entry load or exit load or both. Entry load is the charge that is levied upon intial investment. Exit load or back end load is the chare which is levied when you sell your shares before the set time which is usually five to ten years from purchase.