Mutual fund is a collective pool of investible surplus funds of individual investors managed by expert fund managers to meet the common investment objective.
When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in the same proportion as his contribution amount put up with the corpus (the total amount of the fund).
Advantages of Investing in Mutual Funds:
- Mutual Funds provide higher returns that can beat inflation to grow your money in the long run.
- Mutual Fund investment decisions are taken by expert fund managers based on the intensive research and analysis of the companies where the funds are invested.
- Indian Mutual Fund industry has very strict regulations and guidelines laid by SEBI.
- Investments can be done in diversified industries hence they provide safer returns
- Maintenance of mutual funds are cheaper since they do not require any demat account.
- Money is liquid as payments are made by cheques or credited directly through to the bank account.
- Some of the mutual funds ELSS (Equity Linked Savings Schemes) provide tax benefits under Sec 80C.
Classifications of Mutual Funds:
Based on Tenure:
1) Open Ended Schemes: They can be bought or sold at any time at the prevailing NAV and do not have any fixed tenure.
2) Close Ended Schemes: They have a fixed tenure with a fixed corpus available during a specified period of time with a defined maturity date.
Based on Asset Class:
1) Equity Funds: They are invested in stocks.
The Equity Funds are sub-classified depending upon their investment objective, as follows:
- Diversified Equity Funds
- Sector Specific Funds
- Large Cap Funds
- Mid Cap Funds
- Small Cap Funds
- Multi Cap Funds
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2) Debt Funds: A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt.
3) Hybrid Funds: They are invested partially in stocks and partially in money market
4) Real Funds: They are invested in commodities
Based on Investment Philosophy:
1) Diversified Equity Funds: The funds are diversified across sectors to reduce the overall portfolio risk.
2) Sector Funds: They are invested in a particular sector, like Manufacturing
3) Index Funds: track the components of a market index, such as the Standard & Poors 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
4) Exchange Traded Funds: Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and most of them seek to mirror the return of an index, a commodity or a basket of assets.
5. Fixed Maturity Plans: They invest in fixed income instruments, like bonds, government securities, money market instruments having a fixed maturity date. It could be 15 days, 30, 90, 141, 180 or even 365 days.
Mutual Funds are great methods to save tax and plan retirement. One can start SIPs early in tax saving funds so that when financial year ends you are in no hurry and at the same time your tax savings are properly planned. Similarly, investing through SIPs in mutual funds is a perfect planning to retire rich. Start early and even a monthly investment of Rs 2000 - 5000/- can make you crorepati when you retire - Start your retirement planning now!
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