What are mutual funds?
- It is the collective corpus of a group of investors with a similar investment strategy.
- It is not an investment option but a mechanism to invest in various other assets such as stocks, bonds, gold, real estate etc.
- A fund manager who has the investing expertise, to meet the objectives of the fund, manages this corpus.
Why invest through mutual funds?
Mutual funds are not just professionally managed but also enable portfolio diversification, which is one of the basic tenets of sound investing.
Besides this, MFs have several other advantages such as:
- Risk reduction – As MFs invest across stocks in different sectors, overall risks are reduced.
- Tax efficiency – MFs are a tax friendly avenue, particularly equity oriented schemes
- Flexibility - There are multiple schemes on offer. You can pick and choose as per your risk appetite, return expectations and overall investment objective.
- Cost effective - The fund bears lower transaction costs due to high volumes. His benefit is passed on to the investors.
- Well regulated - Mutual funds are registered with SEBI which has laid down several rules to protect investors.
Types of mutual funds
There are various categories of funds available in the market to suit different investment needs.
These funds invest a bulk of their corpus in equity or equity related papers. The aim of these funds is to provide long-term capital appreciation. There are various types of equity schemes and each comes with a different risk-reward proportion.
These funds invest their corpus in debt and money market instruments such as government securities, bonds, fixed deposits etc. They carry significantly less risk in comparison with equity funds. At the same time, the returns on these funds are also comparatively less. This is a good option for investors who would like to protect their corpus from uncertainties of the equity market and opt for stable income.
These funds invest in debt as well as equity in a pre-determined proportion in order to reduce risk and offer moderate returns. Since there is an exposure to equities, investors can participate in equities as well as hedge the associated risks.