A Mutual Fund is a professionally-managed trust, where the savings from many investors are collectively invested as one. This money is then invested in various securities such as stocks, bonds, short-term money market instruments and commodities such as precious metals.
When you invest in mutual funds, you may quit worrying about where and how to invest. Let your fund managers take a call based on thorough market research, monitoring and experience.
Mutual funds can also invest in other assets like bonds, cash, or commodities like gold and other precious metals. This is called diversification and it allows you to reduce the risk of investing in one particular stock or sector. Additionally, it gives you a broader exposure to various stocks and sectors.
Mutual funds are more or less classified as liquid investments; unless guided by a pre-specified lock-in period. This means, as an investor you can redeem your unit holdings at any point (subject to exit load, if any) -- giving you any time access to your money. Further, funds are well integrated with the banking system -- which means that most funds can transfer money directly to your bank account.
If you are investing in equity growth funds, then you are largely putting your money in stocks. The main objective of these funds is to achieve long-term capital growth. Equity funds invest at least 65% of their corpus in equity and equity-related securities. These funds may invest in a wide range of industries/sectors or focus on one or more sectors. These funds are suitable to invest in if you have a higher risk appetite and you have a long-term financial goal.
Following a simpler approach, debt/income funds usually invest 65% of the amount in fixed income securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds are likely to be less volatile than equity funds.
With an aim to provide stability of returns and capital appreciation, balanced mutual funds invest in both equities and fixed income instruments. These funds generally tend to invest around 60% in equity and 40% in debt instruments such as bonds and debentures.
If you are looking for a fund that offers liquidity and capital preservation with moderate income, then this is a suitable choice. Money market/liquid funds invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit and Commercial Paper for less than 91 days. These funds are ideal to invest in if you are a corporate or an individual investor and wish to earn moderate returns on surplus funds.
Gilt mutual funds invest exclusively in government securities. The Gilt funds do not carry a credit risk - where the issuer of the security can default. However, it comes with an interest rate risk i.e. risk due to the rise or fall in interest rates.
The Income Tax Act offers tax deduction under specific provisions of the Income Tax Act, 1961. Designed to generate capital growth, ELSS mutual funds invest primarily in equities and largely suit investors with a higher risk appetite for capital appreciation. Spread over medium to long-term, tax saving funds comes with a lock-in period of 3 years.
Index funds are attached to a particular index such as the BSE SENSEX or the S&P CNX NIFTY. Their performance is linked to the results of that index. Here, the portfolio comprises stocks that represent an index and the weightage assigned to each stock is in line with the identified index. Hence, the returns will be more or less similar to those generated by the Index.
Sector-specific funds invest in the securities of a specific sector or industry such as FMCG, Pharmaceuticals, IT, etc. The returns on these funds are directed by the performance of the respective sector/industries.
Sector funds allow an investor to diversify funds across multiple companies within an industry. These funds tend to be riskier as the performance is directly linked to that of the overall sector.
You’re unlikely to have missed mutual fund commercials that end with the disclaimer “Mutual fund investments are subject to market risks, please read all scheme related documents carefully.” Have you ever wondered what that means? Here are the various kinds of risks that mutual funds are subject to:
When a debt fund invests in fixed income securities, they may be subject to interest rate risk due to the rise or fall in interest rates.
This is applicable to the underlying fixed income securities of mutual funds. If a bond issuer cannot repay a bond it may end up being a worthless investment.
As much as mutual funds offer the convenience of investing, the investors cannot determine the exact composition of a fund’s portfolio, nor can they directly influence which securities the fund manager can buy.
While the above disclaimer holds true for these risks, investors are also advised to be aware of other regulatory risks or changes while investing.”