If someone told you that there is an investment option that is managed by an expert, has an expert looking into it, and lets you get started with even a small amount, would you be interested? If your answer is yes, then mutual funds are the way. Imagine ordering a thaali at your favourite restaurant where you can eat a variety of different foods in one affordable package! Mutual funds also work in a similar way. Beginning with this article I will be writing all about investing in mutual funds, and how they have opened up a new and informed avenue of investment for us to select from.
So what are mutual funds?
A mutual fund is a professionally managed trust that pools the savings of many investors and invests them in securities like stocks, bonds, short term money market instruments and commodities such as precious metals. They present an option for investors who lack the time or knowledge to make traditional and complex investment decisions.
How do they operate?
A mutual fund company collects money from several investors, and invests it in various options like stocks, bonds etc. This fund is managed by professionals who understand the market well, and try to accomplish growth by making strategic investments. Investors get units of the mutual fund according to the amount they have invested. The asset management company is responsible for managing the investments for the various schemes operated by the mutual fund.
Types of mutual funds
Equity Oriented Fund
Equity funds invest a major part of its corpus in stocks and the investment objective of these funds is long-term capital growth. When you buy units of an equity mutual fund, you effectively become a part owner of each of the securities in your fund’s portfolio. Equity funds invest minimum 65% of its corpus in equity and equity related securities. These funds may invest in a wide range of industries or focus on one or more industry sectors. These types of funds are suitable for investors with a long-term outlook and higher risk appetite.
Debt/Income Funds
Debt/ Income funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds invest minimum 65% of its corpus in fixed income securities. By investing in debt instruments, these funds provide low risk and stable income to investors with preservation of capital. These funds tend to be less volatile than equity funds and produce regular income. These funds are suitable for investors whose main objective is safety of capital with moderate growth.
Balanced Funds
Balanced funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. These funds provide both stability of returns and capital appreciation to investors. These funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth. They generally have an investment pattern of investing around 60% in Equity and 40% in debt instruments.
Money Market/ Liquid Funds
Money market/ Liquid funds invest in safer short-term instruments such as treasury bills, certificates of deposit and commercial paper for a period of less than 91 days. The aim of Money Market /Liquid Funds is to provide easy liquidity, preservation of capital and moderate income. These funds are ideal for corporate and individual investors looking for moderate returns on their surplus funds.
Gilt Funds
Gilt funds invest exclusively in government securities. Although these funds carry no credit risk, they are associated with interest rate risk. These funds are safer as they invest in government securities.
I shall be continuing with the journey through mutual funds in my following article.
