Mutual funds are a popular investment option for many individuals looking to grow their wealth over time. They offer the benefits of diversification, professional management, and accessibility to a wide range of assets. In this post, we will explore what mutual funds are, how they work, the different types available in the market today and how to invest in them.
What are Mutual Funds?
A mutual fund is an investment vehicle that pools money from multiple investors with similar financial goals. The pool of money is then invested in a diversified portfolio of stocks, bonds or other securities by a professional fund manager who aims to achieve specific investment objectives such as growth or income.
The value of each investor’s share in the mutual fund changes based on fluctuations in the underlying investments’ prices. As such, if you own shares in a mutual fund that rises in value over time, your investment grows too. Conversely, if it loses value, your investment decreases as well.
How do Mutual Funds Work?
Mutual funds operate under two primary structures: open-end and closed-end funds.
Open-End Funds
Open-end funds issue new units or shares continuously at net asset value (NAV). This means that investors can buy into the fund anytime they want at its current NAV price. Additionally, open-end funds allow investors to sell their shares back to the fund at any time based on its current NAV price less any applicable fees.
Closed-End Funds
In contrast to open-end funds where there is no limit on the number of units issued; closed-end funds have a fixed number of shares outstanding which trade on stock exchanges like regular stocks and ETFs (Exchange Traded Fund).
These differences make closed-end mutual funds susceptible to deviations from their underlying Net Asset Value per Share (NAVPS), leading either trading at premium when demand exceeds supply or discount when supply exceeds demand.
Types of Mutual Funds
Mutual funds come with varied objectives ranging from capital appreciation through equity exposure, income generation from bonds or a combination of both, and even alternative investments. Here are the different categories of mutual funds available in the market today:
Equity Funds
As the name suggests, equity funds invest primarily in stocks. They offer investors exposure to a diversified portfolio of companies across various sectors and industries. Equity funds can be further categorized into large-cap, mid-cap or small-cap funds based on market capitalization (size) of the company.
Debt Funds
Debt mutual funds invest mostly in fixed-income securities such as government bonds, corporate bonds, treasury bills among others. These funds are ideal for those looking for regular income streams with relatively lower risk than equities.
Balanced Funds
Balanced mutual funds invest in both equity and debt securities to create a balanced portfolio that aims at delivering long-term returns while also managing risks.
Index Funds
Index mutual funds follow specific stock indices like NIFTY 50 or S&P BSE Sensex by investing in all the constituent stocks proportionally to their weights on an index. The objective is not to beat the benchmark but replicate its performance at low cost.
Sectoral/Thematic Funds
Sectoral/thematic mutual fund schemes focus on specific sectors such as IT, banking or themes like ESG (Environmental Social Governance), commodities etc., offering investors concentrated exposure rather than diversification otherwise offered by diversified Equity Mutual Fund Schemes.
International/Global Mutual Funds
These types of mutual fund schemes allocate money overseas markets providing Indian Investors opportunity to participate in global economic growth story besides diversifying their portfolios geographically.
How to Invest in Mutual Funds?
Investing In Mutual Fund has become lot easier now with technology intervention enabling online investment services through various channels including via websites and mobile apps offered by Asset Management Companies(AMCs), Robo-Advisors platforms & Stock Brokers .
Here’s how you can get started:
1) First things first – Identify your financial goals and risk appetite. This will help you determine the type of mutual fund scheme that is most suitable for your needs.
2) Next, research on the different mutual funds available in the market today, their performances over time, and check if they align with your investment goals and risk profile.
3) Once you have identified a mutual fund that suits your needs, start investing through any of the channels mentioned above by completing requisite documentation or KYC process.
4) Finally, monitor your investments periodically to ensure they are aligned with your financial goals and make changes as necessary based on market conditions or changes in personal circumstances.
Conclusion
Mutual funds offer investors an excellent opportunity to diversify their portfolios across various asset classes while relying on professional management expertise. However like every other form of investment it comes with its own set of risks which can be mitigated through proper planning & periodic review. So before making any decision do consult a financial planner who can guide you better on how to pick right Mutual Fund Scheme depending upon individual’s requirements.