Mutual fund is a financial/investment vehicle that pools out money from investors to invest it in different securities including equity shares, bonds, debentures, etc. These investments are managed by professionals working in asset management companies and are invested in different securities according to the objectives of the fund. In essence they help small investors to get access to professionally managed funds and also diversify their investment.
The value of a mutual fund depends on the net market value of the portfolio of the company (Portfolio- As per portfolio definition, it is a collection of a wide range of assets that are owned by the company).
When an individual invests in a mutual fund, He/she buys a part of the company’s portfolio at NMP. It is important to note here that investing in mutual funds is different from investing in a company. It is also important to note that one does not get voting right by being a member of mutual funds and secondly when you buy a unit of a mutual fund, you buy small parts of shares of each company in the fund’s portfolio.
How do Mutual funds work?
A mutual funds company pools out money from different investors and uses this to invest it in the assets which they find the best out of the various options available. Generally, this decision is made by taking into consideration its objectives. People who invest in these funds gain by following ways – by way of dividends received earned from invested company’s shares, by way of interest earned on debt securities, by way of capital gain earned by the company via selling securities at profit, and by a rise in the price of securities in the company’s portfolio.
This gain depends on the performance of the securities owned by the company.
Different securities
Types of Mutual Funds
There are several types of mutual funds to suit different types of investors. Each of the types has its characteristics and objectives. Some of the most common types are as follows-
Equity Fund- As the name suggests, this type of fund invests in equity shares of the company. There can be several subtypes of equity funds like small-cap, medium-cap, and large-cap. Or on basis of stability like highly stable, moderately stable and volatile, etc
Fixed Income Funds- These are funds that focus on securities that provide fixed rates of return like debentures, bonds, etc
Index Funds- These funds invest their money in companies belonging to a particular index say Nifty50 etc. Index funds have gained a lot of popularity recently.
Mixed Funds- These funds consist of a mixture of equity and debt. The idea or the objective of these funds is to get a higher rate of returns via equity and to balance the risk involved in equity shares by investing in debt securities which provides stability and reduces risk.
International Funds- These funds invest their money in securities of foreign countries.
For Some of the top Mutual funds in India
**NOT A FINANCIAL ADVICE!
Advantages and Disadvantages of Investing in Mutual Funds
Advantages-
Professional guidance- Investments are managed by professionals which have several years of experience and requisite skills in the field. One does not need to have much knowledge about finance and markets to invest in the stock market
Easy and Time-saving- Investing via mutual funds is easy and timesaving as one does not require to follow stock markets regularly and does not need to have the knowledge and skills required for investing. Also, the amount needed to invest is pretty small and even small investors can start investing
Diversification- Mutual funds help the investors to diversify his/her portfolio and thus reduce the overall risk, as the investors are not dependent on just 1-2 company’s performance.
Disadvantages-
Costly- Investing via mutual funds is costlier than investing directly in shares and bonds of companies as one has to pay commission to the mutual fund company
Difficulty in selection- As there are so many mutual funds available in the market, it becomes difficult for an investor to compare different mutual funds and then select one
Dilution – Diversification of portfolio can also prove to be a disadvantage to the investors as it can lead to dilution of funds which can lead to poor returns
NOT risk-free- Mutual funds have comparatively less risk as compared to equity investing but they are also not risk-free and are also subject to conditions prevailing in the market.
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