Tools
Mutual Funds

To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.

It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

What are the benefits of investing in Mutual Funds?

Many of us dread the thought of managing our own investments. With a professional fund management company, people are put in charge of various functions based on their education, experience and skills.

As an investor, you can either manage your finances yourself, or hire a professional firm. You opt for the latter when:

  1. You do not know how to do the job best – many of us hire someone to file our income tax returns, or almost all of us get an architect to do our house.
  2. You do not have enough time or inclination. It’s like hiring drivers even though we know how to drive.
  3. When you are likely to save money by outsourcing the job instead of doing it yourself. Like going on a journey driving your own vehicle is far costlier than taking a train.
  4. You can spend your time for other activities of your choice / liking
  5. Professional fund management is one of the best benefits of Mutual Funds. The infographic on the left highlights all the others. Given these benefits, there is no reason why one should look at any other investment avenue.

What are the various types of mutual funds?

Various types of Mutual Fund schemes exist to cater to different needs of different people. Largely there are three types mutual funds.

1. Equity or Growth Funds

  • These invest predominantly in equities i.e. shares of companies
  • The primary objective is wealth growing or capital appreciation.
  • They have the potential to generate higher return and are best for long term investments.
  • Examples would be
  • “Large Cap” funds which invest predominantly in companies that run large established business
  • “Mid Cap funds” which invest in mid-sized companies. funds which invest in mid-sized companies.
  • “Small Cap” funds that invest in small sized companies
  • “Multi Cap” funds that invest in a mix of large, mid and small sized companies.
  • “Sector” funds that invest in companies that are related to one type of business. For e.g. Technology funds that invest only in technology companies
  • “Thematic” funds that invest in a common theme. For e.g. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
  • Tax-Saving Funds
2. Income or Bond or Fixed Income Funds
  • These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.
  • These are relatively safer investments and are suitable for Income Generation.
  • Examples would be Liquid Funds, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc.
3. Hybrid Funds
  • These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
  • Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Services, Child Services and Monthly Income Services, etc.