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What are Mutual Funds? Why should one Invest in Mutual Funds?


 

According to Wikipedia A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities. The money collected is invested in equities, bonds and other form of securities. The fund in mutual funds is managed by the Fund Manager.

Each investor has his own units, which is the portion of the holdings in the fund. The gains generated through these investments are proportionately distributed amongst the pool of investors in the fund.

Investing in mutual funds is way different than investing in stocks. Usually stocks give voting rights to the investor and a mutual fund does not. A share in mutual funds represents investment in variety of stocks instead of just one.  The price of a mutual fund is referred as Net Asset Value (NAV) per share. NAV is derived by dividing the total value of securities in the portfolio by the total number of shares outstanding.

The biggest advantage of investing through a mutual fund is that it gives small investors access to professionally-managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital

Mutual Funds in India

Mutual funds in India are registered with SEBI. They operate within the provisions of regulation created to protect the interests of the investor

Average assets under management (AAUM) for July 2020 stands to Rupees 27,28,115 Crores.

The AUM of mutual fund in India has grown for Rupees 13.17 trillion as on July 31st, 2015 to Rupees 27.12 trillion as on July 31st, 2020 more than 2-fold increase in the span of 5 years.

The total number of accounts (or folios as per mutual fund parlance) as on July 31, 2020 stood at 9.21 crore (92.1 million), while the number of folios under Equity, Hybrid and Solution Oriented Schemes, wherein the maximum investment is from retail segment stood at about 8.03 crore (80.3 million). 

(Source: Association of Mutual Funds in India)

 

Role of Fund Manager

Fund Managers are trained investment professionals whose main role is to manage and oversee the mutual funds operations and the make sound investment decisions through robust analysis and ensure best returns to the investors.

Types of Mutual Funds

Let us understand the different types of mutual fund schemes available to help investor to arrive at sound investment decision.  Broadly, any mutual fund will either invest in equities, debt or a mix of both.

 

 Equity Funds:

1.    These invest predominantly in equities i.e. shares of companies

2.    The primary objective is wealth creation or capital appreciation.

3.    They have the potential to generate higher return and are best for long term investments.

4.    Examples would be Large Cap, Mid Cap, Small Cap, Multi Cap, Sector Funds, Thematic Funds and Tax Saving Funds

Income or Bond or Fixed Income Funds

1.    These invest in Fixed Income Securities, like Government Securities or Bonds, Commercial Papers and Debentures, Bank Certificates of Deposits and Money Market instruments like Treasury Bills, Commercial Paper, etc.

2.    These are relatively safer investments and are suitable for Income Generation

3.    Examples would be Liquid Funds, Short Term, Floating Rate, Corporate Debt, Dynamic Bond, Gilt Funds, etc

Hybrid Funds

1.    These invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.

2.    Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans, etc

Source: https://www.mutualfundssahihai.com/

 

 Further, they can be open-ended or close-ended mutual fund schemes

Open-Ended Funds

In an open-ended scheme, the investor can invest and redeem at any time and it does not have any maturity.

Close-Ended Funds

Close-ended funds have a fixed maturity period. An investor can only invest during the initial period which is known as New Fund Offer or NFO period. The investment of the investor will automatically be redeemed on the maturity date.

There is a fund for nearly every type of investor or investment approach. It is important that investors choose schemes which suit their goals, risk profile, time horizon and after a careful evaluation of the scheme features and objectives.

Why should one invest in Mutual Funds?

Following are some reasons why one should invest in mutual funds:

Managed by Experts

Mutual funds are handled by qualified and trained fund managers who are skilled in making sound investment decisions based on market research. Most investors do not have enough knowledge about markets and cannot make strong investment decisions and do not devote time for monitoring the performance. The job of a fund manager is to track all such variables and alter the portfolio of the investors to maximize returns.

Diversified portfolio

Mutual funds usually invest in two main classed i.e. debt and equity. Some funds are purely debt, and some just invest in equity; and some are combination of both. Mutual funds help in creating balanced and diversified portfolio.  For instance, one component in the portfolio does not perform, the outperforming component in the portfolio will make up for the less performing.

Flexibility

One can invest in a lumpsum amount or invest in small amounts time to time which is possible by SIP (Systematic Investment Planning).

Start gradually

You can start your SIP with investment as little as 500 Rupees per month. You do not have to wait to stack up cash to make an investment. Therefore, one can make optimum use of available cash and maximize returns.

Accessibility: Ease of buying

Mutual funds are offered by mutual funds companies or mutual funds brokers. Hence making it easy to buy even for the new investors investing for the first time.

Simple and easy to understand

Due to the simplicity, mutual funds are easy to understand and transact.

Blog written by AbdulRahman, Intern , Barakah Finserve LLP


DISCLAIMER:  THIS BLOG IS FOR INFORMATION AND NOT TO SOLICIT ANY BUSINESS.  ALTHOUGH BEST EFFORTS ARE MADE TO ENSURE THAT ALL INFORMATION IS ACCURATE, OCCASIONALLY UNINTENDED ERRORS AND MISPRINTS MAY OCCUR.  IT IS VERY IMPORTANT TO DO YOUR OWN ANALYSIS AND SEEK PROFESSIONAL ADVICE BEFORE MAKING ANY INVESTMENT BASED ON YOUR PERSONAL CIRCUMSTANCES. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS; READ ALL THE SCHEME RELATED DOCUMENTS CAREFULLY. THE PAST PERFORMANCE OF THE MUTUAL FUNDS IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE OF THE SCHEMES. BARAKAH FINSERVE LLP OR ITS STAFF WILL NOT BE RESPONSIBLE FOR ANY LOSSES ARISING OUT OF ANY INVESTMENT DECISION YOU TAKE  

  


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