Mutual fund is an investment vehicle where the pool amount of investors is collected and invested into different types of stocks, bonds and securities.
Mutual funds are regulated by SEBI (Securities Exchange Board of India)
Mutual funds are managed by professionals generally called as fund managers or portfolio managers.
The duty of portfolio manager is to manage the funds carefully and return the expected sum to the investors for which he/she charges the management fee.
How to invest in Mutual Funds?
Many banks and financial institutions offer mutual funds scheme. It is like a fixed amount payment for pre-determined fixed time.
SIP (Systematic Investment Plan) is a mutual fund plan where one can invest from atleast Rs.500 per month for some time. Even though it looks like a small amount, if done consistently returns may be high.
Where do Mutual funds invest?
The money pooled from investors is invested into
- Government bonds
- Corporate bonds
- Money market
- Options and Futures
Benefits of Mutual funds:
By investing into mutual funds one can reduce the risk as there is an assistance of portfolio manager. Investing with own knowledge and taking up the whole risk by own may be avoided using mutual funds
It is always better to keep your eggs into different baskets to avoid losses. It means one shouldn’t take the risk of investing the whole sum into single security. Analysis should be made and investing into different industries can help you. If one sector goes down the same will be countered by a raise in another sector.
There is certain type of mutual funds called Equity Linked Saving Scheme (ELSS). It gives you tax benefits under Section 80C of Income Tax Act.
Mutual funds have delivered a great yield to the investors in the past and continuing with the same flow.
Mutual Fund Structures:
There are two types of mutual fund structures
Open end mutual funds:
Investor can put in the amount into these kinds of mutual funds any time and can be withdrawn anytime.
Close end mutual funds:
It is just an opposite to open end mutual funds. Investor can put in the money only on the starting day of the fund and can be withdrawn only at the time of maturity. These are traded just like shares in the stock market with low liquidity.
Types of Mutual Funds:
The money pooled is only invested into debt side. Government bonds, corporate bonds, debentures are best examples. These offer fixed returns with relatively low risk.
The money pooled is invested into equity shares and is of high risk.
It is a combination of debt funds and equity funds. It offers you the steady returns of debt and higher risk filled returns of equity.