What is a mutual fund?

If you have stepped into the world of investments, you most likely have come across mutual funds. A mutual fund pools in money from several investors and invests it in a variety of securities such as stocks, gold, bonds, etc. The investments are done by a seasoned professional, called Fund Manager, as per the fund scheme and characteristic. The investor is then issued units in proportion to the investment amount.  Once you’ve invested in a fund, it’s essential to know if your fund is doing well. For this, we have the Net Asset Value (NAV), which gives the value of your investment on a particular day. It also helps you to calculate the return on your investment and assess the performance of a scheme. It represents the value of underlying assets of the mutual fund minus the liabilities, divided by the number of outstanding mutual fund units. So, the NAV changes as the market value of securities changes. 

Mutual funds are currently one of the most popular investment options for both seasoned and rookie investors as you can invest in small amounts as low as Rs 100 p.m. Majority of the mutual funds have easy liquidity and do not have any lock-in period.

Indian residents above 18 years of age, non-resident Indians, Persons of Indian Origin, corporate bodies, cooperative societies, and other investors approved by SEBI are eligible to invest in mutual funds. Let’s now take a look at how a mutual fund operates, the advantages of investing in a mutual fund and the various types of mutual funds.

How does a mutual fund work?

The most significant advantage of mutual funds is that once you put in the investment amount, you don't have to actively manage the fund or monitor the performance of the market. Experienced fund managers manage mutual funds, manage your investments and also make decisions that help you reap benefits. So, mutual funds offer a hassle-free investment experience.

What are the types of mutual funds?

There are three broad categories of mutual funds based on the investment in the underlying security:

• Equity Funds:

  These funds invest at least 65% of assets in equities and equity-related instruments. The returns vary depending on the performance of the market. Equity mutual funds are high-risk instruments, best suited if you have a substantial risk appetite and a long-term investment horizon

• Debt Funds:

  These funds invest in fixed income instruments, such as bonds issued by the government that offer a fixed rate of return. It is ideal if you want a low-risk investment with steady returns. Debt fund also includes Money Market Funds. These funds invest in highly liquid instruments that include cash and other equivalent securities with a short-term maturity of less than 12 months. These funds provide low-risk investments and offer great returns with liquidity.

• Hybrid Funds:

  These funds invest in a mixture of equities and debt securities and each hybrid fund targets different types of investors. Hybrid funds are often considered to be a little more risker than debt funds but much safer than equity funds.  Debt oriented hybrid funds offer low growth, while equity oriented hybrid funds offer a better growth with moderate risks.

What is NAV in Mutual fund (Part 2)

Why invest in mutual funds?

Now that you know what a mutual fund is, here are some of the key advantages of choosing a mutual fund over other investment options:

• Excellent returns:

  Your returns are likely to be higher than traditional saving options such as fixed deposits.

• Different modes of investment:

  You can set up a Systematic Investment Plan (SIPs) or opt for lumpsum payment to invest in mutual funds. You can also set up the frequency of the SIPs as per your convenience.

• Diversified portfolio:

  A mutual fund invests in more than one type of security to minimize the risk.  So, you get to diversify your portfolio quickly without individually investing in so many different assets or securities.

• Tax benefits

  Investments in open-ended equity mutual funds such as Equity Linked Saving Schemes (ELSS) allows you to claim deductions up to Rs. 1.5 lakh in a year under Section 80C of the Income Tax Act.

• Professional money manager:

  For those who don’t have the time to track the market regularly and realign their portfolio accordingly, mutual funds provide an excellent way alternative. For a small fee, this task is done by a professional, whose sole objective is to maximise returns for his/her unit holders.

Mutual funds are a great addition to your investment portfolio. So, begin your investment journey today.