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A mutual fund is an investment vehicle that pools money from investors to invest in assets like equity and debt. A mutual fund invests in shares, bonds, government securities and other assets strategically. A portfolio manager appointed by the fund house manages the mutual fund. A fund manager has the market knowledge and expertise to do the same
A mutual fund’s portfolio is constructed in a way to match its investment objective. They offer small investors a diversified portfolio of securities that are professionally managed. Mutual funds can be of several types. Broadly they can be categorized based on the assets they invest. Equity funds, debt funds and hybrid funds are the three types of mutual funds based on the asset class. Mutual funds can also be classified based on investment option, structure and strategy.
Mutual funds’ performance is affected by market volatility. A fund investing in equities is more volatile than a fund investing in debt securities. Hence mutual funds aren’t completely risk free. Returns earned on mutual funds are taxable as per the investment holding period. Short term capital gains are subject to short term capital gains tax (STCG tax). Whereas, the long term capital gains are subject to long term capital gains tax (LTCG tax). The taxation of mutual funds varies with the asset class. For example, all equity funds are taxed in a similar manner
Active funds are a type of mutual funds that continuously seek to outperform the market. They aim to generate better returns than the market
Passive funds are those funds that invest only in index stocks. They invest in the same proportion as that of the index. Passive funds try to generate returns similar to that of the market. Few examples of passive funds are index funds and exchange traded funds ETFs
These funds can be actively bought and sold at their Net Asset Value (NAV). The NAV of open ended funds changes daily and also there is no restriction on the number of units a fund can have. Therefore, the funds are highly liquid and easy for investors to enter and exit anytime.
Closed ended funds have a fixed number of units. Also, they have a fixed asset base. Closed ended funds have a mixed maturity period. The NAV of these funds doesn't fluctuate on a daily basis. Investors can only invest in these funds during a New Fund Offer (NFO). Once the NFP closes, new investors cannot enter, and existing investors cannot exit until maturity. However, to ensure liquidity, the units of these funds are traded on the stock exchange. One example of a closed ended fund is a fixed maturity plan
The dividends from mutual fund investments are directly reinvested back into the fund under the growth option
The profits earned by the fund are regularly distributed among the unitholders, under the dividend option
Equity mutual funds in India invest at least 65% of their total assets in stocks. Since these funds invest only in stocks, they have a significant amount of risk associated with them. Also, in the long term, these funds have the potential to generate significant returns to their investors. Under equity mutual funds, there are different types of funds. These funds are classified based on category and investment objective. Following are the types of equity mutual funds:
Debt mutual funds in India invest a major portion of their assets in debt or fixed income instruments. They invest in government securities, corporate bonds, debentures and money market instruments such as treasury bills, commercial papers, and certificates of deposits. Debt mutual funds invest in securities with high ratings. Also, in comparison to equity mutual funds, the risk levels in debt mutual funds are lower. Following are the types of debt mutual funds:
Hybrid mutual funds in India invest in both debt and equity. These funds were formerly known as balanced funds. Also, some hybrid funds invest in other assets like gold and real estate. Since these funds invest across asset classes, they attract investors with moderate risk tolerance. Following are the types of hybrid mutual funds:
There are a variety of mutual funds in the market. Each fund has a different investment objective. Also, the minimum investment amount is as low as INR 500. This makes investing accessible to every individual. One can invest in a fund whose investment objective aligns with their financial goal.
One of the major advantages of investing in mutual funds is that they offer diversification. Mutual funds invest in multiple instruments and companies, in case of equity. Therefore, the portfolio is well diversified and is subject to less volatility when compared to a pure stock investment. Mutual funds also diversify the risk by investing across various sectors and asset classes.
Mutual funds are highly liquid investments. Investors can enter and exit these investments at any time. Unlike fixed deposits, these investments have a flexible withdrawal policy. However, exit load and lock in period in case of ELSS funds have to take into consideration
Not all investors know where to invest and how to invest. Experienced fund managers manage mutual funds. The fund manager pools money from various investors and makes investments across different assets. Their strategic decisions are backed by thorough research and analysis. This helps in generating significant returns to investors.
One can invest in mutual funds with as low as INR 500. Mutual funds encourage investors to start small savings through Systematic Investment Plans (SIPs). Therefore, mutual funds are suitable for all kinds of investors. As per the convenience of the investor, they can choose the investment amount and frequency for their SIPs.
Mutual fund investments are now easier than before. One can quickly invest in mutual funds online. They can do this either by directly visiting the asset management company’s (AMC) website or through online platforms that facilitate investments. Scripbox is one much platform that enables investors to invest in mutual funds online. The investing process is completely paperless and hassle free. Therefore, one can invest in mutual funds sitting at home.
Securities Exchange Board of India (SEBI) is the governing body for mutual funds. Every fund house has to follow the guidelines issued by SEBI. With SEBI's fund categorization investors can easily understand the funds objective and the risk levels. All AMC's publish fact sheets of a fund on a regular basis. Therefore, the investor is aware of the fund holdings, AUM and other details. This makes the entire process of investing in mutual funds safe and transparent.