Mutual Fund Guide for Beginners

A mutual fund is an investment in which funds of multiple investors are pooled, and then they are invested by a fund manager in a portfolio of securities. These securities include stocks, bonds and various other assets.

 

A benefit of mutual funds that attract investors is that these funds are professionally managed and the approach is optimised for wealth generation. Moreover, mutual funds are a great option if you are looking to diversify your investment portfolio.

Check out the attractive features and benefits of investing in mutual funds.

 

1. High Liquidity

 

Mutual fund investments offer a higher level of liquidity, which means that you can buy and sell units on any business day based on the prevailing net asset value (NAV) on that particular day. This makes it easier for you to conveniently cash out, as needed. 

 

2. Portfolio Diversification

 

With mutual funds, you get the opportunity to diversify your investment portfolio by making investments in various areas. Mutual funds help you by pooling your money and investing it in various investment areas like stocks, bonds and other investments. 

 

This diversification lowers the risk as you do not invest all your money in a single place, and instead distribute it across various investments.

 

3. Professional Fund Management

 

Yet another benefit of investing in mutual funds is that a professional fund manager manages your funds. These are experts, hired to invest and generate maximum returns with the lowest risk. They analyse the market, research, and then decide on an investment. The fund manager’s experience and performance also dictates the fund’s performance. 

 

4. Small Minimum Investment Amount

 

You can start investing in mutual funds with as low as ₹500. This allows you to invest in mutual funds and benefit from professional fund managers even if you find paying a larger sum unsuitable. 

 

5. Tax Benefits

 

Another benefit that boosts the popularity of mutual funds is that you can avail tax benefits when you invest in mutual funds. ELSS is a great option if you are seeking a mutual fund investment that can get you great tax benefits. 

 

Under Section 80C of the Income Tax Act, you can avail deductions of up to ₹1.5 Lakhs when you invest in ELSS funds.

Mutual funds are classified on the basis of asset classes and structure. Here are some types of mutual funds that you can invest in.

 

Based on Asset Classes:

 

1. Debt Funds

 

Debt fund refers to mutual fund investments made towards fixed-income securities such as government bonds, corporate bonds, treasury bonds and other fixed-income securities. The main objective behind these investments is to generate moderate income but at lower risks. As such, these funds carry a lower level of risk as compared to equity funds.

 

2. Equity Funds

 

Equity funds, also known as stock funds, refer to investments made primarily in shares or stocks of companies. The main aim behind these investments is long-term capital appreciation by creating a diverse investment portfolio. 

 

You can do this by investing in various sectors and markets. These funds hold the potential for greater returns, but it comes with a higher level of risk as compared to debt funds.

 

3. Hybrid Funds

 

Hybrid funds, as the name suggests, are a combination of debt funds as well as equity funds. These funds provide a balanced combination of income generation and capital appreciation. You can allocate debt and equity funds based on your personal preferences and risk appetite. 

 

Based on Structure:

 

1. Open-Ended Funds

 

Open-ended mutual funds allow you to purchase them and redeem them throughout the year as per your requirements. You can buy and sell these funds according to the current net asset value (NAV). These funds do not have a fixed maturity date, and unlimited units are issued.  

 

2. Close-Ended Funds

 

Close-ended funds cannot be bought or sold directly, and they have a fixed number of units issued through an initial public offering (IPO) which are listed on the stock exchange. The price is determined based on the market demand and supply. 

 

As you can see, mutual funds can help you achieve your investment objectives. For this, you need to plan and execute your mutual fund investment appropriately. These instruments are associated with some risk, and the right diversification can help you cover it.