In simple words, a mutual fund is an investment tool that pools money or funds from a group of people or investors with a mutual aim to earn a good return on their investments. Mutual funds are managed by asset management companies (AMCs) that hire people or fund managers to invest the money in various stocks, bonds and securities to earn good returns. This money is then distributed among investors as per the proportion of their investment after deducting various expenses by the AMC.
You don’t have to be an expert in the financial market to invest in mutual funds. The best thing about mutual funds is that it offers perennial liquidity – you can withdraw your money any time you want. That is the reason why mutual funds are one of the most popular tools of investment in India today. The numbers speak for itself. On April 30, 2019, Assets Under Management (AUM) for the Indian mutual fund industry stood at Rs.24.79 trillion; a four-fold increase from April 30, 2009 when AUM stood at Rs.5.94 trillion.
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What are the different types of mutual funds?
Before we get into the various types of mutual funds available in the market, it’s important to understand that mutual funds are classified according to various criteria such as:
However, for the sake of simplicity, we’ll stick to only mutual fund types based on asset class in this article.
Types of mutual funds based on asset class
Equity funds: Equity mutual funds are primarily invested in stocks of different companies. In equity funds, at least 65% of the money is invested in shares and returns are based on the performance of these shares in the stock market. Equity funds promise higher returns but come with higher risks as well. Equity mutual funds are good for people with a high-risk appetite. ‘Mirae Asset Tax Saver Fund -Direct Plan-Growth’ equity mutual fund available at Finserv MARKETS is among the top rated mutual funds available in the market with high returns and significant tax savings.
Debt funds: Debt-based mutual funds are good for people who are conservative in mutual funds investment. Debt mutual funds are an excellent option for those who value capital protection while looking for assured (guaranteed) returns. Debt funds invest in fixed income instruments such as government bonds, GILT funds, securities, treasury bills, liquid funds, monthly income plans, etc. With debt mutual funds you earn small and regular passive income with minimal risks.
Money market funds: Money market funds invest in money market instruments such as certificate of deposit, commercial paper, treasury bills (T-bills) and repurchase agreements (repos). Money market mutual funds (MMMF) are ideal for investors with a short-term outlook as these securities have an average maturity of 1 year. Like a savings account, you get a cheque and electronic transfer facility when you invest in MMMFs. This is a relatively less risky form of investment with regular dividends but for the short term.
Hybrid funds: Also called balanced funds, the aim of hybrid funds is to achieve a balance of risk and return with an optimum combination of stocks and bonds investment. Fund managers of hybrid funds work to give investors the best of both worlds by allocating money in varying proportions to equity- and debt-based securities. Balanced funds are safer than equity funds but provide higher returns than debt funds. A perfect recipe for conservative, long-term investment.
Increased awareness and education initiatives on mutual funds such as the ‘Mutual Funds Sahi Hai’ campaign by the Association of Mutual Funds in India (AMFI) have really helped more investors to understand the benefits of mutual funds investment and dispel various myths associated with mutual funds. In fact, the mutual fund industry attributes the success of adding 32 lakh new investors in 2017 just to this single campaign.
A mutual fund is a simple to understand investment tool but there are many facets and factors you need to understand to maximize its benefits. There are several online knowledge resources on mutual funds to educate investors. Keeping yourself updated with this knowledge will help you reach various financial goals in life by leveraging the power of mutual funds.
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