What is a Mutual Fund?

What is a Mutual Fund?

Read this blog to learn about Mutual Funds, types of Mutual Funds, advantages of investing into Mutual Funds & how to get started. To know more, visit FinEdge now!

Although the first Indian Mutual Fund (US-64) was launched in 1964 by the Unit Trust of India, it wasn’t until 1993, which marked the entry of private sector players, that the industry really began to pick up pace. The bullish markets of 2006 to 2008 lent a further fillip to Mutual Funds in India, as retail investors began to view them as a viable way to participate in the equity markets. Recently, the cumulative industry’s AUM (Assets Under Management_ went past the 19 trillion (19 lakh crore) mark.

What are Mutual Funds?

Mutual Funds are pooled investment vehicles. Regulated by the Securities & Exchange Board of India (SEBI), they collect investor moneys basis their individual preferences – such as risk tolerance, liquidity constraints, time horizons and financial goals. Asset Management Companies (AMC’s) launch Mutual Fund schemes from time to time, while prominently stating it’s intended investment philosophy and objective. A separately appointed trustee committee oversees that AMC indeed sticks to the stated investment philosophy.

Mutual Fund schemes are structured as trusts, and they issue units to investors in exchange of their moneys. The moneys collected from investors are deployed by a professional fund management team into a mix of stocks and bonds (or gold, for Gold ETF’s), depending upon the funds mandate. When investors redeem their moneys from mutual fund schemes, they essentially sell their units back to the AMC, which credits the equivalent value of the units on the redemption date, minus loads if any, to the investor.

A large and vibrant community of Mutual Funds Advisors exists today. They assist clients in making investments into the right Mutual Fund schemes, basis their risk appetites and unique objectives. Advisors play a critical role in disseminating information, creating awareness, aligning mutual fund investments to financial plans, and ensuring that clients have an optimal investment experience.

What kinds of Mutual Funds exist?

Although Mutual Funds might seem to have a disproportionately high number of sub categories, they can really be broadly classified as equity, debt, or hybrid. Besides these three primary categories, we also have funds that invest into gold, and international stocks – though their popularities are limited.

So, there are following broad categories of mutual funds:

  • Equity Oriented Funds
  • Debt Oriented/Fixed income funds
  • Hybrid Funds
  • Gold funds
  • International Equity Funds

Most popular among all these are the first three, as Indian markets are one of the fastest growing markets in the world.

Equity Funds

Equity funds invest into shares of companies, and are therefore quite volatile. Within equity funds, we have funds investing into specific sectors of market capitalizations, or based on specific themes (such as infrastructure). Each carries a unique level of risk, and a qualified Financial Advisor can help clients understand them better.

Debt Funds

Debt funds invest into corporate bonds, government securities, and short term fixed income instruments such as CBLO or call money. They earn returns by accruing interest from their portfolio of securities, and by generating capital gains from these bonds. Although they are more secure than equity funds, they too have risks – such as the risk of a bond issuer defaulting, or the risk of a bond price falling due to economic events.

Hybrid/Balanced Funds

Hybrid Funds, popularly known as “balanced funds”, aim to create a “best of both worlds” scenario by combining equity and debt instruments in predefined proportions. Their risk level is contingent upon their actual asset allocation, the proportion of equity allocation, and the fund’s overall strategic mandate.

What are the key advantages of investing into Mutual Funds?

There are several advantages of investing into Mutual Funds - regulatory comfort, an iron tight structure, access to a professional fund-manager’s capability, affordable portfolio diversification, increased long-term wealth creation potential in line with one’s risk appettite, transactional ease, and high liquidity (for most funds), to name a few. The affordability provided by Mutual Fund SIP’s (Systematic Investment Plans), wherein an investor can avail all the aforementioned benefits for an investment as low as Rs. 500 per month, is another key advantage of Mutual Funds.

How to get started

First, one should zero in on a capable, conflict-free Mutual Fund Advisor with a track record of helping clients create wealth. If you have friends and family who have had a good experience with an Advisor, you could ask them to refer you ahead.  Be wary of direct plans offered by Asset Management Companies, as it could be dangerous to step into the world of Mutual Fund investing unadvised! The process of getting started is fairly simple and involves very little paperwork – post an initial KYC requirement and the opening of an online account, you could potentially make all your future investments in a paperless manner. First time investors would be making a smart move by taking the SIP route.

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