What are Mutual Funds? Complete information about Mutual Funds

The methods of saving and investing have changed with the changing times. Before leaving the safes, piggy banks, he saves account, FD,Arrived in RD (Recurring Deposit) etc. and now is the time for equity and funds. However, people have been avoiding getting into it because of the risk involved. Correct information is required to make a profit on this type of investment.

What is Mutual Fund?

Mutual fund is an investment that collects money from investors and buys securities like stocks, bonds. The manager handling the investment list decides where and how to invest the money. For this, he is given a fee, which comes from the money of the fund.

How successful a mutual fund company is, depends on how the securities purchased by it are performing in the market.

Differentiate between mutual fund and stock

Investing in a mutual fund is different from investing in shares of stock. Mutual fund investors are not given any voting rights like stock investors. Also, mutual fund investment is not an investment in a single asset, rather it represents your investment in several different stocks.

How to earn from Mutual Fund?

  1. Stocks and bonds held in the fund’s investment list generate income in the form of dividends and interest, respectively. A fund distributes almost all the income earned in the whole year among the fund owners. The fund gives the option to its investors to take money or reinvest that money to buy more shares.
  2. If the fund sells one of its holdings to a security whose price has increased, the fund incurs a capital gain. Most of the funds also distribute this profit to the investors.
  3. If the holding price of the fund increases, but still the manager does not sell it, the share price of the fund goes up. Then you can sell your mutual fund shares in the market to earn profit.

KYC is necessary before investing-

Before investing in mutual funds, you need to do KYC for your identity. In this process, you will have to submit documents related to your identity and address. This process can be done both online and offline.

Mutual fund charges-

These are divided into two parts –

  1. Annual operating fee –
  • It is the ‘expense ratio’ of the fund which includes the fees for consulting, management etc.
  1. Shareholder Fee –
  • Front End Load – This is the charge to be determined at the time of buying the share.
  • Back End Load – This is the charge to be determined at the time of selling the share.

No-load mutual funds  are offered when the funds are disbursed directly by an investing company .

Penalty – You have to pay this fee for premature withdrawal of funds.

Types of Mutual Funds

Open ended mutual fund-

Mutual funds are usually ‘open ended’, which means that investors can join the fund at any time. There is no lock-in period or fixed maturity date. It is of four types –

1. Debt or Income Fund –

It is the least risky mutual fund investment. In this, your money is invested in government securities, debentures or other debt-related documents. It has regular income.

2. Money Market or Liquid Fund –

These funds invest the accumulated money in short-term financial documents. This is a great fund to invest savings in which you will get better returns as compared to FDs and savings accounts.

3. Equity / Growth Fund –

Equity is the highest paying mutual fund. The pooled fund is invested in equities, so the risk is also high but the return is also high as compared to others. It is an ideal investment if you want to make long term investment. Its types –

Index Scheme –

It invests in indices like Nifty and Sensex. Your investment returns fluctuate with the ups and downs of the index.

Sectoral Scheme –

Under this investment is made in any one sector. For example – medicine, infrastructure, IT etc. These funds also invest in small, medium and large companies. The risk involved is linked to the risk of the sector.

tax saving scheme

It is also known as Equity Linked Savings Scheme (ELSS). The lock-in period of such mutual funds is three years. You also get tax benefits in this. The money of this fund is invested in equity related documents. In the long run, there is an increase in capital. Investments made in ELSS are exempted from income tax under section 80(c) of the Income Tax Act.

1. Balanced Fund –

Balanced funds have a mix of equity and fixed income securities at a pre-determined percentage. In this, along with growth, you also get income at fixed intervals.

close ended fund

Such funds have a fixed maturity period. You can invest in these only at the time of launch or new fund offer (MFO). It has two types –

1. Capital Protection Fund –

Such funds focus on saving your original investment, so invest mainly in fixed income securities with high rates in it. A small part of the money is also invested in equities.

2. Fixed Maturity Plan (FMP) –

As the name suggests, this scheme has a fixed maturity period. The money deposited in this is invested in debt instruments which mature with the maturity of the fund. There is a fixed earning in such a plan.

interval fund

These are a mix of open and close ended funds that allow you to invest at predetermined intervals. In this, you get the benefit of both types of funds.

Take care –

While investing in Mutual Funds, properly assess your risk appetite, investment horizon and expected return. Choose a fund that can give you maximum return on your investment by giving you financial stability, growth and returns.