UNDERSTANDING MUTUAL FUNDS

 

What are Mutual Funds?

A mutual fund is a scheme that pools money from a lot of investors and invests it in stocks, bonds, and other types of short-term debt. All the mutual fund’s holdings collectively is known as the mutual fund's portfolio. Owners of mutual funds purchase shares and hence, are called shareholders entailing a portion of the fund and the money it produces.

Why to buy Mutual Funds?

Mutual funds are one of the best investment instruments to invest into because of the following features which they offer: - 

  • Professional Management: A group of professional fund managers take care of the fund performance based on detailed research.
  • Diversified portfolio: It is commonly said that “Don’t put all your eggs in one basket.” Same principle applies to the mutual fund investment. Mutual fund investment across a wide range of sectors and companies helps reducing the risk of losing money even if one company fails.
  • Affordability: For first investments and subsequent purchases, the majority of mutual funds have relatively low thresholds. One can start the mutual fund investment with a minimum amount of Rs.500.00
  • Easy liquidity: Investors can easily redeem their shares whenever required for the current net asset value (NAV) plus any redemption costs.

Types of Mutual Funds

Money market funds, bond funds, stock funds, and target date funds are the four primary categories into which most mutual funds fit whereby each of them has unique characteristics, disadvantages, and benefits.

  • Bond funds: Bond funds have higher risks than money market funds because they typically aim to produce higher returns. Because there are many different types of bonds, the risks and rewards of bond funds can vary dramatically.
  • Stock funds: Corporate stocks are purchased by stock funds. Stock funds vary widely from one another. For example-
  1. Growth funds have potential to yield higher returns basis their focus on stocks in particular.
  2. Income funds invest in stocks that consistently distribute dividends.
  3. Index funds follow certain market indices, like the Standard & Poor's 500 Index.
  4. Sector funds are particular industry segment focused.
  • Money Market Funds: Risks associated with money market funds are minimal. According to the law, they are only permitted to invest in a limited number of high-quality, short-term securities issued by American businesses and national, state, and municipal governments.
  • Target date funds: Target date funds hold a mix of stocks, bonds, and other investments. The mix gradually shifts over time in accordance with the fund's strategy. Target date funds are also known as lifecycle funds, are designed for individuals with particular retirement dates in mind.

We will come up with information about mutual fund investments and the advantages of mutual fund investments. What are the benefits and considerations of mutual fund investments along with the fees and costs that are involved?

“Mutual Funds do not allow for your intellectual growth, Stocks do. And in life, wealth always catches up with your intellect” By:  Manoj Arora

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