Mutual funds

Key Takeaways

1. A mutual fund is a collective financial instrument, which pulls together money of a large number of investors to purchase a variety of securities like shares or bonds.
2. Through mutual funds, the investor can diversify his\her portfolio. And because of diversification, mutual funds are known as safer investment mode.

A mutual fund is a pooled investment product which invests in securities according to a preset mandate and is available to investors in units. The products are often managed by a fund manager. 

Example

MFs differ from each other in their objectives and can be sold as liquid funds, debt funds, large cap equity funds, index funds etc.

Know more

The price of a unit of MF is known as the Nav (net asset value).

Investors opt for MFs because they don’t need to have a deep understanding of markets as the investment money is chaperoned by a fund manager. 

However, as markets mature and information is freely available, the premise of the fund manager orchestrating returns goes away because there are no extraordinary gains to be had. The involvement of a professional guide necessitates a management fee ranging 2-4 percent of our investment amounts.

MFs do not guarantee a return percentage unlike fixed-income instruments.

Mutual funds meaning

A mutual fund is a collective financial instrument, which pulls together money of a large number of investors to purchase a variety of securities like shares or bonds. A mutual fund is like a basket of investments. When an investor purchases share in a mutual fund, it means the investor purchases a small stake of all the investments included in that fund. Mutual funds help investors to make diversified investments. Financial professionals manage most of them. Because of the wide variety of mutual funds, they allow investors to invest in a wide range of investments. Because of diversification, mutual funds inherits a lower risk. 

Mutual fund types

Equity Mutual Funds – in this mutual fund manager collects money from the interested investors, and then it will be invested in equity or the stock market. This fund is an equity-oriented mutual fund.

Debt Mutual Funds – Same as above, mutual fund managers collect the money from all the interested participants who want to invest in debt mutual funds. Still, instead of investing in the stock market, mutual fund managers invest the collected money in the debt market. Comparatively debt mutual funds carry a lower risk than equity mutual funds because it does not get affected by market fluctuations.

Hybrid Mutual Funds – some part would be of equity mutual funds, some could be of debt mutual funds.

Solution-Oriented Mutual Funds – It is like an education fund, to fulfill the financial need after a specific period, people invest in the solution-oriented mutual fund.

Liquid Funds – Liquid fund is a type of an open-ended mutual fund, usually preferred for short term investment. Through liquid funds, investors invest in money market instruments such as commercial papers, certificates of deposits, repurchase agreements, etc.

Money market funds – Money market funds are open-ended funds. Money market fund is the investment in short term securities such as cash, cash equivalents and debt securities like treasury bills and commercial papers. The short maturity period and minimal risk, these are the two characteristics of the money market fund. For money market funds, the maturity period could be 1 day or 1 year. Here short-term financial assets, are those which are easily converted into cash within a short duration

Etfs – Exchange traded funds or ETFs pool together securities and then divide them up into smaller units to sell to investors. The securities in the portfolio are the same as those on an index of an exchange, in the same weightage, but with more volumes. ETF units get traded like a share on an exchange, offering intra-day liquidity.