What is a Mutual Fund?

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A mutual fund is an investment scheme that pools money from many small-small investors and invests it in a variety of securities such as stocks, bonds, and other assets. Since you are always investing in all sectors and segments in fractions it is not going to break your pocket and you can start investing with small amount every month (SIP) or one go (lump sum).

What is a Mutual Fund?

Mutual funds are managed by professional money managers who make decisions about which securities to buy and sell in order to achieve the fund’s investment objectives.

Investing in a mutual fund allows investors to diversify their portfolios and access a wide range of investments with one purchase.

Why mutual funds and why not stocks directly?

Just by knowing how mutual fund works and it is nothing more than a pooled way of investing in securities like stocks or bonds, then it is obvious for our brain to think why not invest directly in to the stock market or bond markets. It’s possible but not feasible.

Buying stocks directly is also possible, for that you will need a Demat Account and time to do buying and selling of stocks. On top of this, you need to do a lot of market analysis and research each company you are investing in and expect its future growth so money.

Financial literacy matters more here because we have to know taxes as well.

Doesn’t it sound like a full fledged job, right? Yes.

That’s why I wrote it is possible but not feasible for everyone. Unless you know and track the market well, it is very difficult to make profit in the stock market.

So, this is the main reason why mutual fund is right for most of us. Further we need to learn about picking the right mutual fund scheme that will make you a fortune.

But before that know what the different types of mutual funds are.

Types of mutual fund.

1. Mutual funds by asset class.

1.1. Equity mutual funds. (high risk – high return)

Equity mutual funds are a great way to invest in the stock market without having to manage your own portfolio. They provide you investors with access to a diversified portfolio of stocks that are well managed by experienced fund managers.

With equity mutual funds, you can benefit from the expertise of experienced fund managers who have the knowledge and resources to make informed decisions about which stocks to buy, sell, or hold for long term based on the risk factors.

Investing in equity mutual funds can help you achieve your financial goals with highest risk.

While the primary focus of equity mutual funds is on stock market investments, it’s also essential for any investor to understand the ownership dynamics of their investments.

This is where something like a cap table software comes into play. This software helps track the equity ownership of a company, providing a clear picture of who owns what, how much each investor stands to gain in a potential exit scenario, and how further investments could dilute existing shareholders.

1.2. Debt mutual funds. (low risk – low return)

Debt mutual funds are totally off the stock market, it is more like a fixed return giving scheme with less risk compared to the equity market. But returns are limited no matter how the market is doing. This is reason very few people show interest in this scheme.

Fund managers usually buy corporate and government bonds or debentures.

1.3. Hybrid mutual funds. (mid risk – mid-high return)

Hybrid mutual funds are a combination of equity and debt funds. Fund manager switches funds between both markets from time to time in order to give better returns. It may give less returns compared to equity but returns would be slightly stable.

1.4. Solution oriented mutual funds.

Solution oriented mutual fund schemes are for specific goals like building funds for children’s education or marriage, or for your own retirement. People invest in such kind of schemes to beat the inflation of their existing money they have and of course to earn more.

Such schemes come with a lock-in period of at least five years.

1.5. Index mutual funds (Passive mutual funds). (technically no risk)

Index mutual funds are the scheme where the fund manager follows the exchange’s index like NIFTY 50, SENSEX, etc. Since the fund manager has to follow and replicate the index and doesn’t have to do any analysis about the fund we call it passive mutual funds also.

If you want to take less risk in the equity market than index funds are the safest scheme to begin with. Make sure you pick the one that has the lowest tracking error.

For example, NIFTY 50 and SENSEX have given 12-18% P.A. if we compare any 5 years time.

2. Mutual funds based on investment goals.

Now there are certain mutual fund schemes that serve you some investment goals.

2.1. ELSS (Equity Linked Saving Scheme). (risky but returns are good)

Just like a normal equity mutual fund everything is same here but with a minimum 3 years of lock in period. Amount invested today would not be withdrawable for at least 3 years.

You will get benefit of up to ₹1,50,000/- under 80c of income tax. This is the reason why most employees with high income slabs prefer this kind of investment.

2.2. Retirement mutual funds. (considering duration risk is less)

As the name itself defines, such mutual fund schemes are meant for retirement.

2.3. Global mutual funds. (riskiest of all but returns are similar)

Now here we get an opportunity to increase our exposure to the international markets like USA, EU, China, Japan, etc. if you are already invested in India. But here conditions are different according to investing country so read the tax guidelines too.

So these are some of common types of mutual fund schemes.

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