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What are Mutual Funds
Updated on 24th May, 23 63 Views

This blog will cover a variety of topics, including what mutual funds are, why people should invest in mutual funds, types of mutual funds, and much more.

To ace the concepts of Mutual Funds, we will discuss the following topics in detail:

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What are Mutual Funds?

A mutual fund is a type of trust that raises funds from investors with similar financial goals and invests those funds according to the investment objective in a variety of asset classes. In simple terms, mutual funds are financial intermediaries created with the aim of skillfully managing the money acquired from all different sorts of investors.

It is established as a trust, with a Sponsor, Trustees, Asset Management Company (AMC), and Custodian. The trust is created by one or more sponsors who are registered with the Securities and Exchange Board of India (SEBI)  and act similarly to a company’s promoter.

Small or individual investors have access to professionally managed portfolios of stocks, bonds, and other securities through mutual funds. As a result, each shareholder shares proportionately in the fund’s profits or losses.

Additionally, Net asset value per share (NAV) is another name for the unit price of mutual funds in India. The NAV is determined by dividing the total amount of Indian mutual funds by the daily number of issued and outstanding units.

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Why should we buy mutual funds?

In the field of Investment Banking, the reason for buying mutual funds is quite simple as it make investment easy, convenient, and reasonable by collecting money from many investors to purchase securities.

Professional management, diversity, liquidity, affordability, simplicity, and ease of recordkeeping are just a few benefits of mutual funds. Customers that have taken mutual funds also benefit from complete disclosure and strict government regulation.

Experienced traders understand that diversifying their portfolios can lessen the negative effects of a single investment. You can have a diversified portfolio through a mutual fund at a far lower cost than you could likely manage on your own. There are many investment-related books where you can also learn about the experiences of other famous traders.

Mutual funds have the ability to beat inflation over the long term, create capital, and deliver attractive returns on investments. It has greater exposure to the investment fund and a balanced risk-return ratio due to its investments in a variety of assets, sectors, and businesses.

Mutual funds have recently gained enormous popularity, and the industry is growing exponentially. One of the reasons  is that it provides different kinds of plans to meet the needs of the investors.

Advantages of Mutual Funds

In the previous section, we got to know about the various types of financial markets funds. Let us see the various advantages offered by mutual funds:

Advantages of Mutual Funds
  • Tax Efficiency

Under Section 80C of the Income Tax Act, 1961, you are able to invest in tax-saving mutual funds known as ELSS  (Equity Linked Savings Scheme) that are eligible for a tax deduction of up to Rs 1.5 lakh each year.

  • Diversification

Mutual funds may contain hundreds or thousands of securities investing from various businesses, industries, and geographic areas. By diversifying their holdings, investors can lower the risk associated with a specific stock or industry.

The key takeaway is that by participating in a mutual fund, small-dollar individual investors gain access to a diverse pool of securities, something they could not otherwise do.

  • Lower Cost

To build a diverse portfolio, a single investor can purchase stocks or bonds through a mutual fund for a lot less money than they could do it directly.

  • Regulatory Compliance

Undertakings for the  Collective  Investment in  Transferable  Securities (UCITS) follow a strict regulatory framework under which they are structured, managed, and invested. As a result, this provides a safety net for the end investors.

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Disadvantages of Mutual Funds

Let’s look at the drawbacks of mutual funds so you can learn about the safety measures you should take when investing:

Disadvantages of Mutual Funds
  • Volatility

A mutual fund unit price changes due to the movements of the underlying securities. This is the reason why mutual funds cannot ensure a specific rate of return or return on investment.

It would be wiser to invest in more conventional banking products if an investor is risk-averse and demands complete assurance.

  • Diversification

Diversification is frequently listed as one of a mutual fund’s key drawbacks. There is, however, always a chance of over-diversity, which might raise a fund’s running costs, need more due diligence, and erode the relative benefits of diversification.

  • Fluctuating returns

Mutual funds do not promise set returns, so you should always be ready for anything, even a decline in the value of your mutual fund. In other words, there are many different price variations associated with mutual funds.

  • Difficult Phases

Even though long-term investors rarely experience losses, if you unintentionally invest before a terrible period, you will suffer a capital loss. Returns from mutual funds are never assured. Hence, before making an investment, it is advisable to have some basic knowledge of the economy and fund performance.

Types of Mutual Funds

The four main types of mutual funds are equities funds, fixed-income funds, money market funds, and hybrid funds. These mutual fund examples are based on the asset classes that the funds invest in:

Types of Mutual Funds
  • Equity funds

Equity funds invest largely in the stocks of various companies. These funds usually have high levels of investment risk because they invest in the equity markets. You can also include equity investment in your portfolio through this.

  • Fixed-income funds

Fixed-income funds are also referred to as bound funds. Bonds issued by firms and the government make up the majority of the investments made by fixed-income funds. These mutual funds aim to give investors a reliable source of income as opposed to equities funds, which rely on capital appreciation from rising share prices.

  • Money market funds

This is the type of fund that resembles fixed-income funds, but usually limits their assets to government-issued, highly-rated short-term securities such as certificates of deposit, T-bills, short-term bonds, and dated securities.

  • Hybrid funds

Hybrid is the type of fund that invests pooled money into both stocks and debt securities. The ratio of investment in both stocks and debt securities depends on the fund manager and can either be fixed or variable in nature.

  • Debt Fund

A debt fund is a kind of mutual fund that primarily invests in fixed income assets including government securities, bonds, and many other debt instruments. This fund’s main objective is to preserve capital while providing monthly interest payments to investors as a source of income.

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One of the highest rates of global saving is found in India. Indian investors must look beyond the gold and bank FDs that have historically been their best-preferred investment method. Therefore, it is always advisable to invest in mutual funds rather than using old practices as mutual funds offer multiple product choices for investment across the financial spectrum.

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